The Upside of Corruption:  Economic Benefits of Bribery In China

 

 

 

 

 

 

 

 

 

 

Elizabeth Sietsema

Law of Nationbuilding

Fall 2005

 


I.                    Introduction

It has been said that a society “may find a certain amount of corruption a welcome lubricant easing the path to modernization.”[1] This statement is directly contrary to the popular view that corruption is a societal malignancy that should be eliminated.[2]  In fact some studies have indicated that high levels of corruption may have negative consequences such as impeding economic growth.[3]  Inconsistent with these findings, however are countries, such as China, that are perceived to be relatively corrupt, but are still experiencing high levels of economic growth.[4]  Can these two viewpoints be reconciled?  This paper suggests that they can.  

Corruption as a general term implies dishonesty or moral impairment.[5]  Corruption as a general phenomenon may create a net economic loss.  However when corruption is analyzed as a set of behaviors, it is possible that some behaviors that constitute corruption may have an economic benefit. 

This paper proposes that economies in transition such as China that are experiencing high levels of corruption may be able to use the short-term economic benefits of some types of corruption to encourage economic growth.  Research on the economic effects of specific types of corruption is lacking.  In order to address this problem, this paper seeks to define and differentiate types of corruption and analyzes arguments both for and against corruption.  Finally the occurrence of corruption in China is examined and a strategy for efficiently dealing with corruption is proposed.

 

II.                 Corruption Defined

Corruption is a term that can describe a variety of types of acts and behaviors.  In order to assess whether certain types of corruption have positive outcomes, it is necessary to differentiate and decide which specific behaviors can result in positive economic outcomes.  Black’s Law Dictionary defines corruption as “an impairment of integrity, virtue or moral principle.”[6]  While this definition does encompass a wide variety of potential behaviors, for the purposes of this analysis, this definition is much too broad.  It does not define the actors that participate in corruption or even what acts constitute corruption.  It also includes an abundance of situations that may have nothing to do with the political or economic development of a country.  Corruption as discussed in this paper is a political and economic phenomenon.  Samuel Huntington defines corruption as “behavior of public officials which deviates from accepted norms in order to serve private ends.”[7]  More simply put corruption is the “abuse of a public office for private gain.” [8]   It is important to note that the definition of abuse is dependent on culture.  What constitutes abuse in one culture might be perfectly acceptable in another.[9]   Also note that these definitions focus on the behavior of public officials.  It is not necessary for there to be a private actor or second party for corruption to occur, therefore this paper focuses on the behavior of public officials in defining types of corruption.

 

 

 

 

III.               Types of Corruption

It is essential to identify the different types of corruption in order to assess the consequences of corruption.  From the point of view of a public official, there are four different types of corruption.  These are: theft or embezzlement; self-dealing; nepotism; bribery or extortion. 

a.       Theft/Embezzlement

Theft or embezzlement occurs when an official takes public money in violation of a duty.[10]  In terms of possible economic benefits, theft is unlikely to be beneficial to society.  Not only does the official deprive the government of funds that could be used to promote the public good, but no one except the official gains from the act.  Theft also can have a huge impact on the legitimacy of the government because the officials are seen taking funds for their own use directly at the expense of the public.

b.      Self-dealing

Self-dealing occurs when an official participates in a transaction for his own private benefit rather than the benefit of the group the official represents.[11]  This can happen when an official acts in his official capacity to promote his own private business interests.  For example, a licensing official may deny a necessary permit to a company because the official has an interest in a competing company.

            This type of behavior can restrict economic growth.  If officials only promote their own interests then it becomes very difficult for outside investors to protect their interests or even create interests.  This can create monopolistic conditions where there is little competition to promote economic efficiency.

c.       Nepotism/patronage

Patronage and nepotism involve the promotion of family or friends to positions of power.[12]  While nepotism usually deals with favoritism for family members, both nepotism and patronage deal with similar issues because they involve favoritism toward a certain group.  The benefits of this may be that it can actually increase stability.  Huntington suggests that political patronage can strengthen a political party and all it is really doing is subordinating one public interest over another. Therefore he concludes that political patronage is a relatively mild form of corruption.[13] He suggests that this type of behavior is actually beneficial because it encourages order and stability by strengthening the parties.[14]   The negative consequences are that nepotism, patronage or selling of positions can lead to incapable people filling government posts and it leads to the exclusion of capable and honest workers.[15]  The exclusion of capable workers may lead to their alienation, and these rejected yet capable people can create a counterculture that is a threat to the existing political system.

Classifying patronage or nepotism as corruption implies that the official has some type of duty to be egalitarian in promotions.  Patronage is a type of corruption that is heavily dependent on societal norms.  Patronage is a wide spread practice; defining what constitutes an abuse depends on how much favoritism a society allows.  Because there is no bright-line between accepted patronage and patronage that is corrupt, it is extremely difficult to assess whether the corrupt patronage confers any benefit over the patronage that does not constitute corruption. 

 

 

d.      Bribery/Extortion

Bribery and extortion are two ways to describe the same transaction.  The difference between the two is whether the official requests the payment or is offered the payment.  In either event, the basic transaction involves an official taking something of value in order to confer a favor.[16]  It is unnecessary to differentiate between the two because in the real world it is often difficult to determine whether a transaction is bribery or extortion and the end result is the same.  

Bribery has the most potential to be a type of corruption that creates beneficial outcomes.  This is due to the fact that it necessarily involves at least two parties with complimentary interests.  The negotiation of the interests between the parties allows for a flexible system where every party seeks to gain a benefit.  This may lead to benefits for the society overall.  Therefore this paper suggests a way to use bribery to take advantage of the potential gains of this type of corruption.

Any discussion of the economic impact of bribery must acknowledge that the economic consequence can be affected by the potential bargaining power of the official.[17]  An official that can provide a relatively large or relatively scarce benefit will be able to collect more bribe money than an official that provides a more routine service.  Therefore due to the disparity in bargaining power, bribery of high level officials will have a different economic impact from the bribery of low level officials.  High level officials are defined here as officials that have the authority or the ability to make policy decisions.  Low level officials have only limited discretion.  Given their power, high level officials will have the ability to provide scare or large benefits. The bribery of high level officials may be less advantageous than the bribery of low level officials because the political power and public exposure of high level officials gives them more potential to degrade the perceived legitimacy of the regime. 

Another reason why bribery of high level officials may be more damaging to an economy than the bribery of low level officials is the cost of bribing high level officials.  While there are usually fewer high level officials than low level officials, high level officials are usually much more expensive to bribe.  This could be particularly true in situations where there is a crackdown on corruption.  The increased risk of getting caught may be enough to deter low levels officials who get relatively small payoffs but merely makes high level officials extort larger bribes to cover the increased risk.[18]  These large bribes may deter future investment in that country.  Even if there is not a deterrent effect, the high level official may not use the bribe money in a way that promotes economic growth. 

High level officials have a lot of lose if they are caught, including their wealth, reputation and prestige.  Therefore they may have a propensity to hide bribe money to avoid detection.  Low level officials are likely to receive low salaries, and therefore they have a propensity to spend the money they collect from bribes in order to supplement their income. High level officials are more likely receive a salary that allows for a relatively high standard of living. Therefore high level officials may have a propensity to save or hide parts of their bribe income in order to avoid detection.  It is economically more advantageous for an official to spend the money that is taken in bribes because then it can cycle through the economy.  When the bribe money is hidden it is temporarily removed from the economy and it cannot be reinvested in the economy to encourage growth.  The economic benefits discussed below that make bribery of low level officials beneficial may also apply to high level officials. The disadvantages of having corrupt high level officials, however, may outweigh the benefits.

The types of corruption outlined above are not mutually exclusive.  For example bribery can happen in tandem with theft.  A customs official may take a bribe to let goods through the border for a reduced duty.  In this case the official may keep the entire bribe and the reduced duty for herself.   Therefore she is guilty of both accepting a bribe and theft because she failed to hand the duty over to the government.  Schliefer and Vishny [19] argue that this bribery with theft is a particularly difficult type of corruption to deal with because the amount of the reduced duty and the bribe combined may be less than the amount of the duty that should have been imposed.    Therefore, not only is the government deprived of funds but the bribers have little incentive to inform on the officials or refuse to engage in the bribery because they are saving money.  In the situation of pure bribery, the bribers have an incentive to inform on the corrupt officials because the bribers will save money by not having to pay the bribe.[20]

IV.              Causes of Corruption:

The literature on corruption attributes corruption to a variety of different causes.  These causes range from a failure to adequately monitor the honesty of bureaucrats to well-meaning yet misguided regulations.[21]  One notion that is often mentioned but generally rejected is the notion that corruption is a cultural phenomenon.[22]  There is no country in the world where corruption is lawful.[23]  Corruption may actually be encouraged not by the local culture but by investors from developed countries.  Most bribes are paid by large multinational corporations from developed countries.  In fact the tax laws of most industrialized countries including France, Canada, Germany and Australia, until recently allowed for a tax deduction for bribes paid overseas.[24]  Therefore a company could be prosecuted for engaging in bribery in its home country but is given a tax break for engaging in the same conduct in foreign countries.[25]

From an economic viewpoint corruption occurs because individuals get an immediate benefit from engaging in corruption and the government fails to offer incentives or disincentives to overcome this benefit.  Corruption presents an assurance or a collective action problem.[26]  An assurance problem occurs when a large future benefit can be incurred if everyone in society gives a present contribution.  However the effect of an individual contribution is negligible on its own.  Each individual will not contribute unless they are “assured” that everyone else will contribute because the only way a future benefit will be achieved is if everyone contributes.[27]   For individuals there is a short-term economic advantage of accepting bribes and this is what creates the assurance problem.[28]  There is an assumption that no corruption is the best outcome.  Each person gets a payoff from engaging in corruption.  However the only way for a person to get a payoff without engaging in corruption is if no one engages in corruption.  If there cannot be an assurance that no one will engage in corruption, then second best solution is to engage in corruption.  Therefore without an “assurance” of some type people tend not to pursue the most efficient outcome.[29]

  From a political viewpoint, Huntington offers a comprehensive explanation as to what causes corruption.  He argues that corruption is a measure of the defects in political institutions.[30]  Intense modernization tends to be the period in most countries’ development when the highest rates of corruption occur, because it creates or accentuates the political defects.  As evidence, Huntington observes that the United States and Britain were comparatively corrupt during their respective industrial revolutions.[31] 

Huntington gives three reasons why modernization leads to increases in corruption: 1) modernization leads to changes in the values of a society; therefore some behavior that was traditionally accepted may become unacceptable and therefore corrupt; 2)  modernization creates new sources of wealth to which the political structure has access; therefore opportunities for corruption are created; 3) modernization also increases corruption because as countries modernize their governments tend to expand their authority and as the governments grow the number of bureaucrats also grows, allowing more people access to a situation where they can take bribes.   This last reason is why regulations aimed at reforming corruption often result in increases in corruption.  More bureaucrats are required to monitor corruption, therefore more people have government jobs that give them the opportunity to be corrupt.[32]  The consequence of this is that if the government is able to reduce regulation then it will also reduce the opportunities for corruption.

  Also, Huntington observes that corruption is encouraged when there is little opportunity for accumulation of wealth outside public office.  In the U.S many people gain political prestige after making themselves rich.  When the only way to get rich is to through government office, the focus of political power is often swayed toward private gain.[33]   

V.                 Why is Corruption Viewed as Universally Bad?

Corruption is viewed almost universally as a negative occurrence.[34]  Must of this is based on the fact that it emanates from dishonesty.  One of the most fundamental costs of corruption is that it aligns decision-making with personal profit rather than public interest.[35] This may cause corruption to undermine the legitimacy of a government in a democratic system where officials are supposedly responsible to the public.  In undemocratic regimes, corruption may actually strengthen the regime by attracting members who want to partake in the corruption.[36] Also bribery as well as other corruption will often lead to the inefficient allocation of resources when government contracts and licenses are given to parties that may not have earned them on merit but attained the benefit based on connections or ability to pay bribes.[37]  Even though all of these costs can be demonstrated through examples, given the secretive nature of corruption, it is hard to assess their true magnitude through scientific methods.[38]

Despite the difficulties, there are some studies that have attempted to quantify the economic effect of corruption by using proxy measures of corruption.  Paulo Mauro did an empirical analysis of the effect that corruption has on economic growth.  For this study, Mauro used the Business International index which looks at perceived levels of corruption, red-tape, efficiency, etc.  Mauro argues that corruption is negatively associated with high levels of economic growth. [39]  Mauro compared economic growth of different countries to a number of factors including levels of corruption, red tape and judicial efficiency.[40]  His study finds that corruption lowers private investment therefore reducing economic growth.[41] 

There are a number of problems with his study.  One is that he uses a static model to makes his analysis which may not be generally indicative of economic conditions.  He only looks at the period 1980-1983.[42]  Another problem with his study is that it does not differentiate between types of corruption.  The Business International index that Mauro uses to measure corruption defines corruption as “the degree to which business transactions involve corruption or questionable payments.”[43]  Therefore since corruption itself is not defined these perceptions of corruption could include a number of types of behavior. 

Mauro also finds that red tape, which is bureaucratic regulation, and corruption are positively correlated.[44]  He conjectures that corruption may in fact lead to red tape because as officials become accustomed to receiving bribes, corruption becomes more common and increases red tape overall.[45]  Mauro uses an average of the red tape, judicial efficiency and corruption indices to create a bureaucratic efficiency index and he admits that he sees the new index as a better indicator of corruption than the Business International corruption index.[46]  Mauro also observes that all of the institutional factors that he examines in his study are positively correlated.  He acknowledges that this makes it difficult to understand exactly which factors affect growth.[47]   

Mauro cites exceptions to his finding that corruption inhibits growth.  He mentions both Thailand and South Korea as examples of countries that have high levels of corruption or bureaucratic inefficiency.[48]  Mauro also finds that there is a negative correlation between corruption and investment.  This correlation is not significantly different between countries with high levels of red tape and low levels of red tape.[49]  Mauro does not address whether the amount of red tape is measured in terms of the regulation required by law or the regulation that actually occurs after bribes are given.[50]  The indices are compiled from surveys and perceptions about each country;[51] therefore perceptions may be very different from the actual occurrences of the phenomena studied. 

Campos addresses Mauro’s findings in the paper The Impact of Corruption on Investment:  Predictability Matters. [52]   Specifically Campos looks at the phenomenon throughout the late 1980’s and 1990’s that, despite a number of Asian countries being rated as comparably corrupt, they still experienced high rates of growth.[53]  These countries included China, Vietnam, Indonesia and Thailand.  Not only have these countries grown but they have attracted a large inflow of private capital.[54]  The article claims to take a similar approach to Schliefer and Vishny[55] in that Campos analyzes corruption from the viewpoint that different types of corrupt regimes have different effects on investment.[56]  Campos’ argument is that corruption that is more predictable has a smaller negative effect on investment and therefore growth.[57] Campos also finds that lower levels of corruption lead to higher levels of investment.[58]  Therefore it is best to have low levels of corruption but the second best alternative for a highly corrupt country is to make corruption as predictable as possible.[59]  Campos defines predictability as the “degree to which firms are confident that they will, in fact, be able to obtain the ‘product’ they are seeking.”[60]  The article concludes that a possible explanation for the growth in seemingly corrupt Asian countries is the fact that corruption is well organized and has a relatively high degree of predictability.[61]  They do acknowledge that while it may seem advantageous to make corruption more predictable, it may also create the problem of institutionalizing corruption and making the behavior more difficult to change.[62]

VI.              Arguments For Corruption

Even some staunch critics of corruption admit that there are potential benefits to corruption.  Susan  Rose-Ackerman argues that all corruption should be reduced because it is too difficult to limit corruption to the beneficial types of corrupt activities.[63] This argument acknowledges that benefits of corruption do exist.  Therefore if there was a way to isolate beneficial corruption some corruption would be good.  Ackerman also states that due to the excessive cost of controlling corruption, it is most efficient to allow some corruption to happen.[64] 

Since many low level officials are paid insufficient salaries, the parties that use the system are the ones that fund the system by “topping off” official salaries.[65]  In this sense bribery serves the same function as taxation.  Bribery increases the price of the transaction but if the government had to pay the official a larger salary then it would have to raise the money through taxation, which would also raise prices.[66]

Bribe income also helps to attract qualified applicants despite low pay.  Often jobs where the wages are low receive a comparatively large number of applications due to the ability to extort bribes.  These jobs include positions with the police, customs, tax office and immigration.[67]  This is only a benefit to the economy if the hiring decisions have some relation to merit and are not decided solely based on nepotism or patronage. 

.  Nathaniel Leff argues that bureaucratic corruption is actually a way that underdeveloped countries cope with the deficiencies that are present in the political and economic systems.   He characterizes corruption not as a negative phenomenon by itself but as an indicator of deficiencies. [68]  Leff points out that while it is common for the anti-corruption literature to assume that the governments of developing countries are committed to growth, this is not always the case.  In some very traditional or revolutionary regimes the government’s main focus may be on something different than economic growth.  Therefore, corruption encouraged by groups outside the government may actually serve to encourage growth.  Also, the government may discourage economic growth because the leaders believe it could challenge their power base, therefore corruption can serve to counteract a repressive regime.[69]

Leff also argues that corruption serves an important purpose in being an institution that allows minority interests to have some kind of representation in the political process.  This comes about because in many developing countries or countries in transition, it is common that that the political parties do not allow interests outside of the parties contending for power to have representation.  Minority interest groups can gain influence through the ability to offer bribes.   Therefore minority interests may not be able to participate in the formal political system but do have a say in the “effective” political system.[70]  Huntington also says that corruption may act to provide immediate benefits to groups that would otherwise be alienated from the society.  He suggests that in this way corruption and reform have similar purposes because they may serve to prevent revolution.[71]

Acemoglu and Verdier[72] argue that while corruption is not good, trying to eradicate it completely it not beneficial for economic growth.  Rose-Ackerman agrees that since bribery is so costly to control, reform attempts must balance the costs of corruption against benefits from the reform.[73]  Acemoglu and Verdier’s view is that corruption is the trade-off that results from government regulation to prevent market failures.[74]  Therefore while decreases in regulation would help decrease corruption, they would also lead to increased risk of market failure.[75]  They find that the optimal outcome for an economy is to have some regulation to prevent market failures.  Since preventing all corruption is excessively costly if not impossible, allowing some bureaucrats to be corrupt is the necessary cost of regulating the market.[76]  They do however admit that the outcome is actually optimized when the corruption is relatively rare and the market failure important, which is often not the case in developing countries.[77]  The issue in developing countries is often not what is optimal but what would be an improvement.   

Another argument that corruption is beneficial is that it can encourage pareto efficiency.  Pareto efficiency is defined as the best possible outcome that can be achieved without making someone worse off.[78]  In relation to corruption, the idea is that some regulation moves the market away from efficient conditions, either because the legislation is poorly conceived or poorly drafted.  Therefore corruption can serve as a correcting force by moving the market back towards efficiency.[79]  Nathaniel Leff addresses this same idea but does not couch it in these terms.  He argues that corruption is actually a “hedge” against bad government policy.  He acknowledges that this hedge has a cost in that if the policy is good the corruption could push the system in a less favorable direction.  However he sees it as an insurance policy against bad legislation.[80]  Cheung criticizes this view as naïve.[81]  He argues that most regulations are actually enacted to create opportunities for corruption. Therefore regulations that do not encourage corruption are not supported by the people in power.  He claims that the best possible solution would be to eradicate these regulations all together.[82]  Cheung’s recommendation is highly questionable, because if most regulations really are enacted as opportunities for corruption, it is unlikely that any country could actually function.  Cheung over-generalizes when he asserts that all public officials will act only in their own individual best-interest.  Even if Cheung’s assertion is true, corruption can still move the system away from regulations that are enacted with interests other than the overall growth and stability of the economy. Regulations, however, may also promote the public interest.  Acemoglu and Verdier make this point that regulation is sometimes necessary to prevent market failures.[83]

Yet another beneficial aspect of corruption is that it allows entrepreneurs to overcome cumbersome regulation[84]  The bureaucracy in a developing country is likely to be out of date when dealing with economic and political changes. “In many underdeveloped countries, the bureaucracy may be a lagging rather than a leading sector.”[85]  Corruption allows the political system to be flexible and respond to the current demands on the system rather than rigidly complying with regulations that may not address current conditions.  Huntington states that:

 In terms of economic growth, the only thing worse than a society with a rigid, overcentralized, dishonest bureaucracy is one with a rigid, overcentralized, honest bureaucracy.  A society which is relatively uncorrupt—a traditional society for instance where traditional norms are still powerful—may find a certain amount of corruption a welcome lubricant easing the path to modernization.[86]

VII.            Case Study: China

If corruption acts to inhibit economic growth,[87] then China is the exception to the rule.  Despite moderate to high levels of perceived corruption[88], the Chinese economy is currently experiencing high levels of economic growth.  China is currently the fastest growing major world economy.[89]  Just in the third quarter of 2005, China’s economy grew by 9.4%.  In fact the economy is growing so quickly that the government has attempted to slow that growth to make the economic changes more manageable and to try to control inflation.  China’s economy has grown at a faster pace over the last twenty years than any other major country in modern times.[90]  Corruption is a major issue that the Chinese government needs to address in order to make sure that the rapid economic growth does not destabilize the country politically or financially.  Growth in the economy means that there is growth in the opportunities for corruption.[91]  Concerns over corruption have led residents of rural areas to stage recent protests over the government’s response to corruption problems.[92]  In fact in some areas of China, rural residents have instituted recall petitions against corrupt local officials.[93]

Given the illicit nature of corruption, it is impossible to measure the actual rate of corruption that occurs, whether it is in China or any other country.[94]  There are proxy measures, however, which include the perceived rate of corruption and the revealed rate of corruption, which measures the number of people charged with corruption.[95]  Transparency International’s 2005 Corruption Index [96] listed China’s comparative perceived corruption level as 78th among world countries, with a corruption perception index (CPI) score of 3.2.  On a scale of 10, a higher CPI score indicates less perceived corruption.  By comparison, the United States was 17th on the list with a CPI score of 7.6.  Iceland had the first position on the list as the least corrupt country with a CPI score of 9.7.[97]  78th place puts China in the bottom 50th percentile in terms of rates of corruption.  There doesn’t seem to be a clear answer as to whether China’s economic growth has occurred in spite of the moderate level of corruption or whether some types of corruption have helped facilitate the economic growth.

Corruption has been a concern in China since early in its history.  Concerns over corruption have been documented as early as the time of Confucius.[98]  The extraordinary growth of China’s economy as it emerges as a world economy and major trading partner has made the issue of corruption in China a world-wide concern.  In order to understand why China is having difficulty dealing with corruption, it is important to understand how China’s economy has evolved in the post-Mao reform period. 

Before the economic reforms of the last twenty-five years, the Chinese government was highly centralized and operated on a command planning theory.[99]  This meant that the political hierarchy worked from the top down and the state and party exerted control over even the lowest units of government, those being the workgroups (danwei).[100]  This proved to be a very inefficient way of operating the economy.[101]  Despite the inefficiency, the top-down control was an effective restraint on corruption.[102]  Prior to the economic reforms, the state owned all economic resources, including previously privately-held assets and land.[103] Since the central governmental had direct control of all economic resources, it was able to monitor the use of those resources and therefore more easily detect corruption.[104]  

During the height of Mao’s rule there was almost no private property.  Even if someone tried to acquire a specific resource, due to the inefficiency of the command-style planning, many items were scarce or impossible to attain.[105]  Therefore the types of corruption that did occur involved the allocation of scarce resources and the use of connections (guanxi) to attain those resources.[106]    Under these circumstances, officials were restrained from taking their corruption to excess.  Corruption was controlled by the fact that being a public official conferred large comparative benefits that came in the form of access to scarce goods.  Those benefits could not be obtained in any way other than being an official.  Once an official enjoyed the benefits available there were few other opportunities in the economy to benefit more.  The scarcity of resources meant that the payoff of striving for extra benefits did not outweigh the risk of getting caught and therefore officials had a disincentive to push their corruption to excess.[107]  Greater detection rates also gave officials a disincentive to be corrupt because all financing came from the central government and therefore allowed the central government to monitor how resources were used.[108] 

The political system in China has not been able to keep up with the changes brought about due to economic reform.[109]  A major cause of corruption has been the decentralization of China’s economy and political system.[110]  China began its market reform and liberalization in the late 1970’s.[111]  A major instrumentality of the economic liberalization was the decentralization of the government.[112]  Once market liberalization began, decentralization, along with freedom for market forces and private economic growth were the main instrumentalities used by the government to start the reforms.[113]  Decentralization has meant that the state has handed over the power for things like tax, investment and finance to lower-level bureaucracies.[114]    Both the decentralization of the government and the establishment of a system of privately held property have served to encourage corruption by enabling means of committing corruption.  This has further been a problem because, as a former Communist country, China lacked many of the distinctions between the public and private domain that exist in Western economies.[115]  Many provincial authorities do not have the resources, infrastructure or experience to deal with many of the duties delegated to them.[116]

Another reason decentralization has created problems is that the central government, in delegating power to the local governments, has left them with insufficient resources to function.  Local officials supplement what they receive from taxes with other quasi-taxes or “arbitrary fund raising.”[117]  This “ad-hoc public finance” system creates greater room for corruption because local officials already have had to ignore regulations set by the central government to finance their operations just minimally.[118]  While the central government does not actually forbid this “fund raising” the local governments often violate regulations because the actual fees collected exceed limits set by the central government.[119]  Wedeman describes the evolution of the system as going from “pragmatic” to “predatory.”[120]  This delegation has also meant that the state has less ability to detect corruption.[121]  Even the mayor of Shanghai has acknowledged that the practice when dealing with bureaucrats is “no service without money, and poor service with little money.”[122]  Some scholars have estimated that the probability of a licensing official being corrupt is 50%.[123]  The reform actually created corruption because the decentralization gave more bureaucrats the means to enrich themselves, and the privatization of the economy made it acceptable for the officials to hold personal wealth.[124]

Other causes of corruption include inflation as well as the privatization of government owned enterprises.[125]  In a country that was previously immune to inflation if inflation increases rapidly and the government does not keep up with that inflation then the officials become more susceptible to corruption as they see the buying power of their salaries decline.[126]   

The state-run enterprises have also proved to be a hotbed of corruption.  Privatization of these enterprises is further breading ground for corruption.  The four large state-run banks have had large amounts of money stolen by their own employees.  In 2002, $500 million was stolen by three bank employees and the government did not realize the funds were missing until the employees fled the country.[127]  Besides providing opportunities for outright theft, bank employees are also susceptible to bribery.  In March 2005 the head of one of the state run banks quit after it was revealed he took a $1 million bribe.[128]  Obviously vast amounts of money are changing hands illegally.  The lack of proper oversight of the banking industry in China is a major obstacle that China will have to overcome to be competitive with other world economic powers. 

China is not unaware of the corruption problem and the central government has taken strides to try and control corruption.  The Chinese government has utilized “anti-corruption campaigns” as a method of controlling corruption.[129]  In China these campaigns are marked by certain characteristics such as: an increase in the intensity of monitoring; a diversion of resources for short periods from other enforcement activities to detect corruption; increased prosecution which is sometimes achieved by relaxing normal investigative procedures; incentives to catch officials who “rat” on other corrupt officials; calls on the public to report corruption.[130]  China has used the campaign method of controlling corruption because it is the “poor man’s alternative to effective policing.”[131]  Since China does not have the resources for a full-fledged fight against corruption, it diverts resources every so often to do a crackdown to catch a number of corrupt officials at once.  Not only does this increase detection during the crackdown periods but this increase in the detection rate during campaigns serves as a deterrent to other corrupt officials as well.[132]  These campaigns have resulted in the execution of at least twenty-five officials who were convicted of taking bribes as well as lengthy prisoner terms for hundreds of others convicted of corruption.[133]

Wedeman suggests that the Chinese method of anti-corruption campaigns actually intensifies corruption.[134]  This is due to the fact that the actual probability of an official getting caught is only about 1%.[135]  Wedeman suggests that this risk is significant enough to deter low level officials whose payoff from corruption is not extremely high.[136]  High level officials have a much higher payoff and therefore will be more willing to take that risk.  Therefore, while the campaigns may deter low level corruption which may have economic benefits, it does not deter “high level-high stakes” corruption.  Furthermore, as the risk increases, if the officials are not deterred, they require bigger payoffs in order to compensate for the increased risk.  Therefore the increased detection during campaigns intensifies corruption because it causes officials to require bigger bribes to take the risk.[137]  

VIII.         How Should China Use the Benefits of the Bribery of Low Level Officials in its Policies on Corruption?

Since it is impossible to measure the actual rate of corruption, it is impossible to know whether China’s anti-corruption campaigns have actually been effective.[138]  It is possible that while the campaigns have some deterrent effect, the fact that China’s economy is growing so quickly provides many more opportunities for corruption than the campaigns can actually deter.   Wedeman suggests that the effect of the campaigns is that they deter low level corruption but may actually intensify high level-high stakes corruption.[139]  If bribery of low level officials is the type of corruption that has the most positive economic benefits, then these campaigns are actually using resources inefficiently.  The campaigns would be better off focusing resources on detecting and punishing the high level corruption. 

Despite the questionable effectiveness of China’s anti-corruption campaigns, it should probably continue its campaigns.  Campaigns are a comparatively cheap way for China to fight corruption.[140]  Continued campaigns against corruption signal to the population that the regime does not generally tolerate corruption.[141]   This helps to address issues of the government’s legitimacy.  Also, in light of recent protests by the rural population, it is important for the government to make its stance against corruption clear.  Campaigns have the function of detecting and deterring undesirable types of corruption.[142]  It is necessary that the campaigns be redesigned to focus on detecting high levels of corruption and theft. 

If China does refocus its anti-corruption campaigns to fight high level corruption then what should be done about low level corruption?  Despite its possible economic benefits, if it goes unchecked under the current system then it could destabilize the economy.  The suggestion here is that China should both take advantage of the economic benefits of corruption as well as keep corruption under control by permitting the bribery of some types of low level officials, for example customs officials or licensing officials.  Given that the likelihood of a licensing official being corrupt may exceed 50%[143], it is virtually impossible for the government to eradicate low level corruption.  Even if eradication were possible it would deprive the local governments of large amounts of funds, much of which make the functioning of local government possible.  Furthermore, the practice is so entrenched with officials that it may be impossible to find an adequate number of uncorrupt officials.  Therefore the best way for China to take advantage of the benefits of corruption while still seeking to fight corruption is to allow it.

China should implement a scheme where the acceptance of bribes is not per se legal, yet officials can immunize themselves from prosecution by fully reporting the amount of bribes that they accept.  Therefore, if an official were to fully report all bribes, in the form of something like an income tax return, the official would be immune from prosecution for taking those bribes.  An essential part of this scheme in controlling low level corruption is that the government would have to make this reported information available to the public.  This is so that the public can monitor the conduct of officials or even use the information to predict the outcome of proposed business transactions.  Also, if an official did not report the bribe income then the official would still be susceptible to prosecution should the bribe be detected.

This allows China to take advantage of the current benefit that it is experiencing from the bribery of low level officials.  Bribes will still supplement the income of low level officials, reducing the burden on the central and local government to provide bureaucratic resources.  Also, given the growth of the private sector in China, if China cannot keep up with the pay of its bureaucrats then there are plenty of opportunities for those people to move to the private sector.  In order to keep competent employees, China needs a way to offer them sufficient salaries. 

This scheme allows officials to hedge the risk of getting caught.  Therefore, the official has an incentive to report.  The official can take the bribe money and use it to his own advantage, and not have to worry about the risk of prosecution or losing his job as long as he reports the bribe.  The promotion of a culture of honesty among officials is a necessary step to fight endemic corruption.  Giving official an incentive to honestly report bribes is the beginning in a culture of honesty.  In the case of low level officials, they are accustomed to pocketing money.  It will be impossible to directly fight this practice.  Therefore, in order to eradicate the practice it is necessary to take a more subtle approach.  As the officials are perceived as more honest, the legitimacy of the bureaucracy will improve.

The reporting scheme acts as a tool to fight corruption by creating a realm of public information.  One of the most difficult aspects of fighting corruption is that no one is able to concretely measure it.[144]  Therefore it is very difficult to tell if anti-corruption measures are effective or if there are forces that are actually increasing the incidence of corruption.  Furthermore, politicians have no way of gauging how effectively their legislation is implemented if it is being subverted by corrupt bureaucrats.  Leff suggests that if economic growth is to be achieved then it is necessary for politicians to consider how bureaucratic corruption will affect the management of that policy.[145]  This is very difficult if the policy makers have no real information on which to base this evaluation.  By giving officials an incentive to report bribes it creates one of the first pools of information on officials that admit to accepting bribes.  This information can be used in a number of ways and ultimately will aid in impeding the occurrence or growth of bribery.  Even Transparency International advocates that an essential part of curbing corruption is enabling greater access to financial information.[146]  Vishny, Bockyo and Schleifer suggest that efficient bureaucracies can exist when there is free press and the public can effectively monitor the politicians.  While they admit that these are rare situations, they note that when the electorate can monitor politicians the politicians become agents of the public since deviations in behavior can be quickly detected and penalized.[147]

Schleifer and Vishny separately argue that political competition actually decreases corruption.[148]  This occurs because it is generally unpopular to approve of corruption.  This means that a political party that lets corruption get out of control may be ousted and replaced by an incumbent party or regime.[149]  In China this has already begun to occur with rural residents issuing recall petitions for corrupt officials[150]  Therefore, even if the official did accept bribes then fear of retaliation from the public would restrain the degree to which an official was willing to exercise that abuse.  Furthermore, if the type of corruption that occurs furthers an interest that has become valuable to society than the fact that public doesn’t condemn the corruption might be a signal that the values of the public and the regulations are out of line with each other.[151]  Even in areas where the officials are not answerable to local citizens, such as customs officials, the information could be used to create an incentive structure or just to monitor the degree of corruption that occurs. 

Another way in which reporting bribery may actually help improve the efficiency of the Chinese bureaucracy is that it will create a market for bribes.  Shliefer and Vishny propose encouraging competition among officials as a way of driving down the price of bribes.[152] If the information is public then businesses and businesspeople will be able to gauge prevailing bribe rates.  Businesses will be able to gauge if different officials or different regions offer lower rates of extortion or bribery.  Therefore, areas or institutions may become known for being relatively honest or at least cheap when it comes to bribery and therefore will attract business.  These preferences of businesses on who to deal with may help to create a market that will restrain the amount of excessive bribes that cadres can take.

  1. What negative impacts will still exist?

It is important to note that fighting corruption is a lengthy and continuous process.  Corruption cannot be minimized until China is able to stabilize its legal and political systems.  This may not be possible while China is experiencing such high levels of economic growth.  Critics may argue that this de facto legalization of corruption may reduce the legitimacy of the government by giving the appearance that they condone corruption.  However, the government can counter this by allowing freedom of information with the reporting scheme which will make the officials directly reportable to the people.  Increased transparency may actually increase the legitimacy of the government.  No strategy will be the magic bullet that eradicates corruption but strategies such as this that try to control corruption by aligning the incentives of officials with the goals of the government will serve as controls on corruption while allowing for economic growth. 

The biggest question with this strategy becomes whether the government can really give the officials a big enough incentive to report bribes truthfully.  If China continues its campaigns against corruption then it will be able to give officials an incentive to report.  As more officials report in order to hedge the risk of getting caught, the resources that China has to fight corruption can be used more and more efficiently.  As China curbs corruption and the economic and political situations stabilize, China may be able to use other methods to transition to an even less corrupt system.  Will China be able to outlaw bribery all-together?  It may be difficult to wean officials away from taking bribes once bribery is legitimized in practice.  However, officials are currently accustomed to taking bribes and there is no guarantee that it would not take generations to change this practice.

 

IX.              Conclusion

Given the secretive and illegal nature of corruption it is difficult to obtain concrete results on the economic consequences of corruption. The current trend in the study of corruption is to discuss the negative consequences or ways of eliminating corruption.  The literature fails to differentiate between purely harmful corrupt behaviors and corrupt behavior that may confer some benefit.  This trend may in part be fueled by the lack of specific research about the actual economic consequences of different corrupt behaviors.  Analyzing corruption in this way can be highly advantageous to governments dealing with high levels of corruption.  Given the high cost of fighting corruption, countries experiencing high levels of corruption may benefit from studying this distinction in order to aim their limited funds at fighting the most harmful types of corruption.  Furthermore, if more research is available on the possible benefits of certain corrupt behaviors, countries will be able to use that to their advantage in encouraging economic growth.



[1] Samuel Huntington, Political Order in Changing Societies 69 (1968).

[2] See Nii Lante Wallace-Bruce, Corruption and Competitiveness in Global Business—The Dawn of a New Era, 24 Melbourne U. L.R. 349,  349-50 (2000) (discussing of the evolution of views on corruption).

[3] Paulo Mauro, Corruption and Growth, The Quarterly Journal of Economics, Aug., 1995, at 681.

[4] See J. Edgardo Campos and Donald Lien, The Impact of Corruption on Investment: Predictability Matters, World Development, 1999, at 1059.

[5] Black’s Law Dictionary 150 (2d Pocket ed. 1996).

[6] Black’s Law Dictionary 150 (2d Pocket ed. 1996).

[7] Huntington, supra note 1, at 59.

[8] Philip M. Nichols, Corruption as an Assurance Problem, 19 Am. U. Int’l L. Rev. 1307, 1308 (2004) (citing J.S. Nye, Corruption and Political Development;  A Cost-Benefit Analysis, 61 Am. Pol. Sci. Rev. 417, 419 (1967)).

[9] See Huntington, supra note 1 at 59-60.

[10] Black’s Law Dictionary 232 (2d Pocket ed. 1996).

[11] Id. at 631.

[12] Black’s Law Dictionary 518 (2d Pocket ed. 1996).

[13] Huntington, supra note 1 at 70.

[14] Id. at  70-71.

[15] Nichols,  supra note 8, at 1311 (citing Robert Wade, The Market for Public Office:  Why the Indian State is Not Better at Development, 13 World Dev. 467, 474-80 (1985) (discussing the sale of political positions in India). 

[16] Black’s Law Dictionary 78 (2d Pocket ed. 1996).

[17] Susan Rose-Ackerman, The Political Economy of Corruption—Causes and Consequences, Public Policy for the Private Sector (World Bank), April 1996 at 1.

[18] Andrew Wedeman, Anticorruption Campaigns and the Intensification of Corruption in China, Journal of Contemporary China, Feb. 2005, at 115.

[19] Andrei Shleifer and Robert W. Vishny, The Grabbing Hand: Government Pathologies and their Cures 94 (Harvard University Press 1998), originally printed in Andrei Shleifer and Robert W. Vishny, Corruption, The Quarterly Journal of Economics, Aug. 1993.

[20] Id. at 94.

[21] See Daron Acemoglu and ThierryVerdier, The Choice Between Market Failures and Corruption, American Economic Review, March 2000 at 194, for an overview of the varying viewpoints on the causes of corruption. Rose-Ackerman suggests that corruption occurs due to a failure of the government to align private self-interest with government self-interest. (Susan Rose-Ackerman, Corruption and Government:  Causes, Consequences, and Reform, 2 (1999)).

[22] Wallace-Bruce, supra note 2, at 352.

[23] Id.

[24] Wallace-Bruce, supra note 2, at 358.

[25] The US has been on the forefront of fighting corruption in global business.  The US outlawed the  payment of bribes by US citizens or corporations with the Foreign Corrupt Practices Act (FCPA) which was passed in 1977.  While it was hoped that the FCPA would become an international model law it was not until the 1990’s that other developed countries began to join in the fight against corruption in global business.  Wallace-Bruce, supra note 2, at 359-362.  For further discussion of the FCPA see, Beverley Earle, The United States’ Foreign Corrupt Practices Act and the OECD Anti-Bribery Recommendation, 14 Dick. J. Int’l L. 207 (1996).

[26] Nichols, supra note 8, at 1310.

[27] For a detailed discussion of the concept of an assurance problem, See Amartya K. Sen, Isolation, Assurance the Social Rate of Discount, Quarterly Journal of Economics, Feb. 1967, 112-124.

[28] Nichols, supra note 8, at 1311.

[29]Id. at  1341.

[30] Huntington, supra note 1, at 59.

[31] Id..

[32] Id. at 59-62

[33] Huntington, supra note 1, at 66.

[34] Nathaniel Leff, Economic Development Through Bureaucratic Corruption, American Behavioral Scientist, Nov. 1964, at 8.

[35] Rose-Ackerman, supra note 17, at 4.

[36] Id.

[37] Id. at 3.

[38] Id.

[39] Paulo Mauro, Corruption and Growth, Quarterly Journal of Economics, Aug. 1995, at 701.

[40] Id at 682.

[41] Id. at 683.

[42] Id.

[43] Id. at 684.

[44] Id. at 685.

[45] Id.

[46] Id. at 686.

[47] Id. at 685-86.

[48] Id. at 687.

[49] Id. at 695.

[50] Id. at 696.

[51] Id. at 683-84.

[52] J. Edgardo Campos, Donald Lien and Sanjay Pradhan, The Impact of Corruption on Investment: Predictability Matters, World Development, 1999, at 1059. 

[53] Id. at 1059.

[54] Id. at 1060.

[55] Shleifer and Vishny, supra note 19.

[56] Campos et al., supra note 52, at 1061.

[57] Id.

[58] Id.

[59] Id.

[60] Id. at 1062.

[61] Id. at 1065.

[62] Id.

[63] Mauro, supra note 39, at 682, citing Susan Rose-Ackerman, Corruption: a Study in Political Economy (1978).

[64] Rose-Ackerman, supra note 17, at 1.

[65] Wallace-Bruce, supra note 2, at 357.

[66] See Shleifer and Vishny, supra note 19, at 94-95; Leff supra note 34, at 8.

[67] Wallace-Bruce, supra note 2, at 357.

[68] See Leff, supra note 34, at 10-12.

[69] Leff, supra note 34, at 10.

[70] Id. at 8.

[71] Huntington, supra note 1, at 64.

[72] Supra note 21.

[73] Rose-Ackerman, supra note 17, at 1.

[74] Acemoglu and Verdier, supra note 21, at 194.

[75] Id. at 195.

[76] Id. at 206.

[77] Id. at 209

[78] http://en.wikipedia.org/wiki/Pareto_efficiency, last accessed 11/18/2005.

[79] Steven N. S. Cheung, A Simplistic Equilibrium Theory of Corruption, Contemporary Economic Policy, July 1996, at 1.

[80] Leff, supra note 34, at 11.

[81] Id.

[82] Cheung, supra note 79 at 2.

[83] Acemoglu and Verdier, supra note 21, at 194-95.

[84] Shleifer and Vishny, supra note 19, at 92.

[85] Leff, supra note 34, at 13.

[86] Huntington, supra note 1, at 69.

[87] Mauro, supra note 39.

[88] Transparency International, 2005 Corruption Perceptions Index, http://www.transparency.org/surveys/index.html#cpi.

[89] David Barboza, China’s Economy Surge 9.4% in 3rd Quarter, N.Y. Times, Oct. 21, 2005.

[90] Id.

[91] See Huntington, supra note 1.

[92] Id.

[93] Jim Yardley, Report Calls Communist Party Rule Essential to Democracy in China, N.Y. Times, Oct. 20, 2005.

[94] Andrew Wedeman, Anti-Corruption Campaigns and the Intensification of Corruption in China, Journal of Contemporary China 93, 94 (2005). 

[95] Id

[96] Transparency International, supra note 91.  Transparency International is a non-governmental organization founded by former executives of the World Bank.  Its purpose is to fight corruption by raising awareness of corruption world-wide.  One of the tools that Transparency International uses to raise awareness is its Corruption Perception Index.  The index is a rating of perceived tolerance of government corruption and scores are assigned on a scale of 1 to 10 based on survey results.  For a discussion of the initiatives of Transparency International See Alejandro Posadas, Combating Corruption Under International Law, 10 Duke J. Comp. & Int’l L. 345, 405 (2000).

[97] Id.

[98] Michael Johnston and Yufan Hao, China’s Surge of Coruption, Journal of Democracy, at 80 (1995).

[99] Id. at 82.

[100] Id.

[101] Id. at 83.

[102] Id. at 86.

[103] Id. at 82.

[104] Id. at 83.

[105] Id. at 83.

[106] Johnston and Hao, supra note 102 , at 83.

[107] Id.

[108] Andrew Wedeman, Budgets, Extra-budgets, and Small Treasuries:  Illegal Monies and Local Autonomy in China, Journal of Contemporary China, 2000, at 489.

[109] David Barboza, Wave of Corruption Tarnishes China’s Extraordinary Growth, N.Y. Times, Mar. 22, 2005.

[110] Wedeman, supra note 108, at 490.

[111] Johnston and Hao, supra note 98, at 83.

[112] Id. at 84.

[113] Id. at 83-84.

[114] Id. at 84.

[115] Id. at 82.

[116] See Wedeman, supra note 108, at 489-90.

[117] Id. at 492.

[118] Id.

[119] Id.

[120] Id. at 493.

[121] Johnston and Hao, supra note 98, at 84.

[122] Id. (citing FBIS-China, 28 September 1993).

[123] Wedeman, supra note 18, at 105.

[124] Johnston and Hao, supra note 102, at 85.

[125] Id. at 89.

[126] Id. at 90.

[127] Barboza, supra note 109.

[128] Id.

[129] Wedeman, supra note 18, at 93.

[130] Id. at 106.

[131] Id. at 96.

[132] Id.

[133] Barboza, supra note 109.

[134] Wedeman, supra note 18, at 115.

[135] Id. at 105.

[136] Id. at 115.

[137] Id.

[138] Id.

[139] Id.

[140] Id. at 96.

[141] Id. at 114.

[142] Id.

[143] Id. at 105.

[144] Wedeman, supra note 18, at 115.

[145] Leff, supra note 34, at 14.

[146] http://www.transparency.org/cpi/2005/2005.10.18.cpi.en.html

[147] Maxim Boycko, Andrei Shleifer and  Robert Vishny, Privatizing Russia, 56 (1995).

[148] Supra note 19, at 102-103.

[149] Id. at 103.

[150] Yardley, supra note 93.

[151] See Huntington, supra note 1, at 64-65, for a discussion of value systems and corruption.

[152] Shleifer and Vishny, supra note 19, at 103.