Abstract
The Chinese economy has undergone three decades of rapid economic growth, while at the same time experiencing a dramatic increase in the incidence and intensity of corruption. It is argued that these developments have been closely related and follow a fundamental logic of institutional arbitrage thriving in the context of a hybrid economy located somewhere between plan and market. Analysing various manifestations of corruption, it is shown that under certain background conditions corruption can be instrumental to economic development and drive a market-oriented transformation process. However, with the formal institutional framework crossing a threshold line of market coordination capacity, the potential of corruption to bridge institutional deficiencies in the formal system erodes and corrupt activities become increasingly ‘dys-functional’, impeding economic development and growth. In the course of the discussion Chinese guanxi networks are shown to provide a highly effective ordering mechanism for corrupt transactions, thereby facilitating the proliferation of corruption in China.
Zusammenfassung
In den vergangenen drei Jahrzehnten hat die chinesische Wirtschaft ein rapides Wirtschaftswachstum erlebt, während gleichzeitig eine dramatische Zunahme in der Häufigkeit und der Intensität von Korruption zu verzeichnen ist. Der vorliegende Artikel argumentiert, dass diese Entwicklungen in einem engen Zusammenhang stehen und einer grundsätzlichen Logik institutioneller Arbitrage im Kontext einer hybriden Ökonomie zwischen Plan- und Marktwirtschaft folgen. Anhand der Untersuchung unterschiedlicher Erscheinungsformen von Korruption wird gezeigt, dass Korruption unter bestimmten Bedingungen hilfreich für wirtschaftliche Entwicklung sein kann und einen marktwirtschaftlich orientierten Transformationsprozess fördern kann. Überschreiten jedoch die formalen institutionellen Rahmenbedingungen einen Schwellenwert bezüglich der Koordinationsfähigkeiten des Marktes, so geht die Fähigkeit durch Korruption institutionelle Schwächen zu überbrücken verloren und Korruption wird zunehmenden „dys-funktional“ und damit hinderlich für wirtschaftliche Entwicklung und Wachstum. Wie der Artikel zeigt, stellt insbesondere das chinesische System der Guanxi-Netzwerke ein sehr effektives Ordnungsprinzip für Korruptionstransaktionen dar und trägt maßgeblich zur Verbreitung von Korruption in China bei.
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Notes
This is not to say that corruption was not existent in the Maoist era. However, due to the specific socio-economic model adhered to as well as incentive structures existing in these years, corruption manifested itself in a very distinct manner and differed in form and scope from corrupt practices in the post-Maoist reform era. Cf. Liu (1983), Heberer (1991), Kwong (1997). See Mao Zedong’s “Twenty Manifestations of Bureaucracy” (“Guanliao zhuyi de ershi zhong biaoxian”) as published in 1967 for the political and ideological instrumentalisation of the term “corruption” in this era.
As corruption is by definition a ‘hidden’ phenomenon, and any measurement of its intensity in society is bound to be imprecise. According to the Corruption Perception Index 2010 published by Transparency International (2010) China is ranked with 3.5 points in a scale ranging from 0.0 to 10.0, with 10.0 indicating a corruption free setting. Taking the cases brought up in the context of China’s periodic anti-corruption campaigns as an indication of the prevalence of corruption in China, it can be observed that while the absolute number of cases filed is plateauing, the intensity of corruption (measured in funds involved and number of people participating in a particular activity) is increasing (Wedeman 2004, 2005; Quaide 2007; Gong 2002). See also Yu (2008).
In political science and sociology, however, there also exists a substantial literature highlighting a “greasing the wheels” function according to which corruption promotes commerce, or provides lower-status groups access to economic and political rents they would otherwise be denied. See e.g. Merton (1938), Huntington (1968).
We differentiate between ‘spot-market’ and ‘relational’ corruption. ‘Spot-market’ corruption refers to a situation where bribes are paid ‘on the spot’ in order to gain a once-off advantage and no repeated interaction is envisaged by the parties involved. The acceptance of a hundred dollar bill being put into the driving documents handed over to a highway policeman who has stopped a truck driver for speeding (and thereupon waives or reduces the penalty), may serve as an example for such a transaction. ‘Relational’ corrupt transactions, in contrast, are characterised by repeated interaction and/or a prolonged period over which the ‘services bought’ are provided. The discussion in this paper focuses on this latter ‘relational’ manifestation of corruption.
In the language of game theory: While both players may have an interest to cooperate at the outset of the game, the dominant strategy of player 2 changes once the first player has made his initial investment in the cooperation. Now it pays for player 2 to renege on his former promise to cooperate. As player 1 can be expected to know the changing incentives determining player 2’s behaviour (first round: cooperate; second round: defect/renegotiate), no transaction will ever materialise if the players cannot embed their transaction in a cooperation facilitating institutional framework.
Seen from a different perspective this implies that guanxi relations can only be established between individuals who possess the ability to provide something valued by their counterparts. See in this context also Lee (2000), Hendrischke (2007).
Cartier-Bresson (1997, p. 474) speaks in this context of an “unequalled futures market of favours and privileged information [where t]he network authorises systems of delays and compensations which are multiple and multilateral in time and space.”
This observation goes in line with social identity theory which shows that the less a person differs from oneself, the easier it is for one to trust this person (Tajfel 1982; Brewer and Pierce 2005). It is also supported by society-centred approaches to the concept of trust, which see regular social interaction (preferably in the form of voluntary membership in associations etc.) as the most important mechanism for the formation of social capital (Banfield 1958; Putnam 2000).
We employ the terms ‘fixed’ and ‘variable’ cost in order to differentiate between the costs of setting up an institutional arrangement (fixed costs) and the costs of operating inside such an institutional arrangement (variable costs).
In addition it must be assumed that reciprocity as a moral standard and socially embedded norm positively influences the honouring of these implicit contracts concluded with members of one’s own network. There is evidence that “reciprocity […] is a universal moral standard in most, if not all cultures, and is of particular importance in an Asian context where social customs and traditions have traditionally worked as a support mechanism.” (D’Souza 2003, p. 32)
“[I]t seems that the Chinese are not used to compartmentalising the different roles that they have with others and so treat the other person according to the requirement of the current role.” (Walker 2006, p. 4)
It should be highlighted that the notion of an ‘ideal’ solution suggested in this and the following paragraph applies only to the capacity of guanxi networks to provide an ordering mechanism for corrupt transactions. Neither guanxi networks nor (functional) corruption are understood as ideal means for driving economic development in China, but rather as being at most best-practice solutions to economic coordination problems in environments where alternative solutions are not (yet) available.
Lambsdorff and Frank (2010) show that in Western society gifts lack the existence of an explicit quid pro quo, making them less suitable for corrupt transactions than bribes, which include a clear request for reciprocity. However, as shown above, the exchange of gifts in the framework of guanxi networks comes with the explicit expectation of a quid pro quo!
It may be argued that in a social group organised in guanxi networks alone and not knowing non-personalistic ordering systems, the concept of ‘corruption’ would not be defined and therefore not apply! Compare in this context also Granovetter (2007).
Shieh quotes from the documentary video Xiamen teda zousi an [The Enormous Xiamen Smuggling Case] produced by the Central Discipline and Inspection Commission and the Ministry of Supervision.
Quite often particular measures that were tolerated or even promoted at one point in time, because they were considered useful for the economic development of a region or an industry, at a later point of time were then classified as illegal and prosecuted (Song 1996; Ding 2000). The opacity of the concept of corruption has been further increased by different definitions of what constitutes corrupt behaviour depending on specific regions, occupations, work-units, and personal status. As Sun Yan (2001, p. 249) puts it: “[…] banquets and gifts at public expenses may be prohibited as corrupt practices in one place but promoted as necessary measures in another. Using bribes to market products may make a manager corrupt in one place but ‘competent’ in another.”
Italics as in original source.
It should be noted that this discrepancy was to be observed in both directions: lacking liberalisation as well as lacking regulation of decentralised activities.
In this respect, our argumentation stands in line with Huntington’s famous quip that “[i]n terms of economic growth, the only thing worse than a society with a rigid, overcentralised, dishonest bureaucracy is one with a rigid, overcentralised, honest bureaucracy.” (Huntington 1968, p. 386).
Next to the reduction of ‘political risk’, a second major motive to acquire a “red hat” was the wish to raise capital from the formal banking system, which was not accessible for the private enterprise sector. This quest for inputs to the production process is discussed in greater detail below.
Wright (2009) documents developments in the Chinese coal industry where local officials extracted bribes from private coal mine operators based on the requirement that small mines would have to feature “reasonable production structures” (heli buju) in order to evade closure by the regulators. In this case ‘gatekeepers’ were obviously pro-actively asking for corrupt payments in return for granting entry to the industry and abstaining from administrative harassment. From the perspective of the bribe-payers these corrupt transactions provided for a stabilisation of their business environment. However, as in this case corruption served to undermine—in principle reasonable—industry regulation, it should be understood as having been ‘dys-functional’.
In order to classify corruption as ‘functional’ in this context, the underlying institutional innovations must lead to a reduced transaction cost level and therefore promote economic interaction and welfare derived. Institutional innovations designed for individual rent-seeking purposes do not apply. For the latter case see Ngo and Wu (2009).
The concept of corruption addressed here is therefore similar to the notion of “speed money” which in the literature is understood to be able to attain ‘second-best’ solutions in comparison to the ideal state of affairs. This complies with our pragmatic understanding of ‘functional corruption’ as paving the way for best practice solutions.
It may be argued that corrupt transactions which have been observed in large number in the context of the privatisation of former state-owned enterprises from the late 1990s to the early 2010s should be interpreted as ‘functional’ in so far as they allowed the “efficiency residual” as well as the “value residual” of privatisation to be realised (Daniel and Siegelbaum 1997; Lu et al. 2008). However, in this period privatisation was high up on the agenda of Chinese politics and would have been implemented with or without corrupt practices. As such corruption did not contribute to the realisation of these privatisation rents but rather diverted public funds in private hands and interfered with the competition-driven allocation of state assets. As such we understand these practices as social welfare reducing and ‘dys-functional’.
Singh (1992, p. 50) documents the following differentials between plan-based clearing prices and market prices for December 1988 (all prices in Yuan RMB per ton except trucks (pieces) and timber (m3)):
Wright (2009) calculates the rents created by the dual pricing system in the Chinese coal industry in 1988 alone as amounting to 27 billion Yuan RMB.
Cai et al. 2009 demonstrate that up to the present day land use rights are an important object of corrupt activities in China.
See in this context also the discussion in Sapio (2009) who tries to determine differences in the—network based—manifestation of corruption, rent-seeking and clientelism. Her account of the Shenyang case, involving nearly 200 people including the deputy governor of Liaoning province, documents another case of large-scale, dys-functional corruption.
Ironically, part of this improvement in the formal institutional set-up has been brought about by ‘functional’ corruption and its capacity to drive institutional development. Here corruption has made itself obsolete.
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Taube, M. Relational corruption in the PR China. Institutional foundations and its (Dys)-functionality for economic development and growth. Z Vgl Polit Wiss 7 (Suppl 1), 89–116 (2013). https://doi.org/10.1007/s12286-013-0158-5
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DOI: https://doi.org/10.1007/s12286-013-0158-5