Sunday, June 28, 2020

Can corruption be good for growth?

Yuen Yuen Ang, political science professor at University of Michigan, has written an ambitious book. “China’s Gilded Age: The Paradox of Economic Boom and Vast Corruption” is much more than what one may infer from its title. Its goal is to redefine corruption, reexamine the relationship between corruption and economic growth, and analyze (often empirically) the role of corruption in China’s development during the past 40 years.

Ang begins with two important points: to better understand it, corruption needs to be unbundled into different types because they are likely to have different effects on economic growth. Second, it needs to be weened away from a Western-centric view that, in part because of inability to distinguish between different types of corruption, tends to overlook typical Western corruptions (say, in lobbying or revolving doors between private and public sectors) and present a biased view whereby corruption exists only in less developed economies. That view, Ang argues, leads to a mistaken belief that corruption is bad for growth (despite dearth of confirming empirical evidence) and to an idealized view of development characterized by “inclusive institutions” (Acemoglu-Robinson) or “open-access societies” (Douglass North). They are both criticized by Ang.

She proposes a four-type breakdown of corruption. First, petty theft (pay bribe rather than fine); second, speed money: street-level corruption (get a shop license faster); third, grand theft (embezzlement on a large scale—Nigeria’s Abacha); fourth, access money (giving permissions to capitalists to engage in big projects). Only the latter, in Ang’s view, is desirable. It has short-run positive effect on growth as it leads to large investments, new infrastructural projects, removal of bottlenecks, and greater employment. In the short-run, that type of collusive action between capitalists and bureaucrats is growth-enhancing. Ang allows that in the longer-run it might have negative consequence by misallocating resources away from other areas where they might have been better used. An example is the real estate bubble in China (“the tragic consequence is that the majority of Chinese people who need homes cannot afford them while the minority who own homes do not live in them”, p. 147) or infrastructural over-investment. However, one cannot exclude misallocation of resources even without corruption: entrepreneurs make wrong decisions all the time. We need to show that bribery leads to generally worse decisions.

The other three types of corruption are not, according to Ang, growth-enhancing. The reasons for that are somewhat obscure: why is speed-money which lets people get government services faster bad while access money is good? This is not explained. The case is, of course, much stronger for grand embezzlement which is  difficult to justify on any grounds.

Ang then proceeds to a nice empirical estimate of the four types of corruption in 15 countries. The results are interesting. It turns out that access money corruption dominates in China and the United States, speed money in India and Russia, grand theft in Nigeria. Yet the differences in the relative importance of these various types of corruption between countries are small. Just by looking at the numbers for Russia vs. China, or China vs. India (pp. 36-41) would lead one rather to say that the  countries are similar although, as Ang argues and many would agree, they are not.

Ang’s approach is, in my opinion, worth pursuing in at least two directors: broadening the sample to all countries in the world, and figuring out either empirically or analytically (more than she does) why different forms of corruption may have positive or negative effect on growth.

In the next part of “China’s Gilded Age” Ang moves to a temporal analysis of corruption in China, from the opening under Deng to Xi’s anti-corruption campaign. A very nice section presents vignettes of the two fallen idols: Bo Xilai, former member of the Politburo’s and rival to Xi for the top party job, and Nanjing’s mayor Ji Jienye. The stories are interesting and instructive and one wishes that Ang would have included a few more (as she obviously could, given that some are tucked away in an Annex).

While the previous part of the book put the accent on access money which is the type of corruption available to “tigers”, Ang does not forget corruption available to “flies”. Here she argues that lower level corruption in China follows a prebendist method of profit-sharing. Salaries are uniform and low. But the fringe benefits, which according to Ang’s empirical research account for 3/4 of bureaucrats’ wages, depend on local  ability to raise taxes and fees. Bureaucrats are thus incentivized to care about local investment and growth because a large share of their salaries depends on them. If entrepreneurs shun their city, their own wages will suffer. Ang quotes an almost religious injunction to local officials to treat capitalists “as Gods” bringing bounty. 

Profit-sharing also has a time dimension: bureaucrats have to be conscious that increasing taxes and fees too much can kill the goose that lays the golden eggs: their salaries may be increased now to the detriment of the future. How that complicated game is played in real life is not always clear. But possibly the fact that lower- and middle-level bureaucrats are not shifted between the prefectures helps them retain interest in local development.

The last part of the book is dedicated to an empirical analysis of the fall from grace of city Party leaders (a database of 331 local party leaders out of which 54 have been demoted or punished in Xi’s anticorruption campaign). A more descriptive and less econometric approach might have helped there. The main points though are that patron-client relationship is important both for ascension  to higher positions as well as for downward mobility (when the patron falls, clients often follow him), and Xi’s campaign cannot be explained only as a power-grabbing exercise. It is more than that even if taking more power for himself and his supporters is not something Xi would reject. 

Corruption is endemic to the system of political capitalism (as I also argued in “Capitalism, Alone”) and the danger of anti-corruption campaigns is to lead to the opposite problem to that of rampant corruption as under Hu Jintao’s leadership:  inaction due to the fear that any decision may be seen as a cause for dismissal. Bureaucrats are very good at that game: the safest way to behave is to do nothing. And that obviously is not good for growth.

It is an important book not only for many who try to understand the roots of China’s success but for a much more sober and less Western-centric view of corruption. Eventually, one hopes, economists will move from their faux-moralizing attitude toward corruption and begin to treat some forms of it as rental income.

Note: There are several odd mistakes or implausible numbers. On p. 161, while explaining the position of the Standing Committee of the Politburo, and the Politburo, Ang mentions that the Central Committee of CCP is elected by the National People’s Congress, “China’s legislative body”. In reality the Central Committee is elected by CCP’s (that is, Party’s) National Congress. Investment is supposed to have accounted for 90% of Chongqing’s GDP under Bo Xilai (p. 131). This is very implausible. Chongqing’s police chief did not ask for asylum in Chongqing’s American embassy, but consulate (p. 133).

Thursday, June 18, 2020

Living in own ideology

In the Summer of 1975, I worked as a tourist guide in Dubrovnik (I started working very young). Dubrovnik is, as many people know, a beautiful city on the Adriatic, on the Croatian coast, that throughout the Middle Ages was a very active port, with contacts throughout the then known world. Venice was its competitor and eventually dominated it; at the end however both the Venetian and the Dubrovnik (Ragusan) republics were abolished by Napoleon in 1797-1806. The existence of Dubrovnik as an independent republic, surrounded on all sides by the powerful Ottoman Empire, was somewhat of a miracle. Ottomans might have regarded it as a useful Hong Kong of the time and never mustered the will to conquer it. Dubrovnik always remained proud of its freedom. In its red flag it emblazoned the golden letters of “Libertas”.

A couple of times that Summer, I went, in the warm and sweet lavender-filled evenings, to watch plays  performed at breathtaking spots in the fort overlooking the harbour. The plays were part of a summer-long Dubrovnik festival. The opening of the festival was always accompanied by the raising of the “Libertas” flag.  I did not think much of it then but the flag ceremony with appropriately rousing music was taken by me to hail back to Dubrovnik’s steadfast resistance to foreign invaders.  Since Yugoslavia  in 1975 was a free country, not ruled by foreigners, or as, it was said then, beholden neither to “imperialists” (the United States), nor to “hegemonists” (the Soviet Union),  I thought it only normal that the flag of “Libertas” be hoisted and cheered.

About ten years later, in a conversation with a friend who watched the same festival, and with communist rule already crumbling, he mentioned how excited he was seeing the fluttering flag of freedom every year; to him it presaged the end of communism and the return of democracy.  I never thought of that then, and, without telling him, I believed that he either made up that feeling ex post (1985 was very different from 1975) or that he simply imputed to others what might have been the thoughts of a tiny minority.

Then a few years ago, when I visited Zagreb the first time after the civil wars, I  met for dinner a Croatian friend whom I have not seen for more than twenty years and with whom I worked in 1975. Somehow during the conversation, she mentioned how the flag of “Libertas” always made her think of Croatian independence and freedom and how she thought that feeling was shared by everyone who was there and saw the flag being raised.

That thought, I had to acknowledge, never crossed my mind. But that third interpretation of the very same event made me think, like in Kurosawa’s movie, that we all live in our ideological worlds and imagine that everybody else inhabits the same one too.

Until things change.

Something similar is happening now in the United States with the ideological impact of the Black Lives Matter movement. Many people thought that racial inequality was indeed an issue in the United States. But it was seen as an ancillary issue, in need of a solution, but not in itself detracting from the view of America as a land of equal opportunity and progress for all. Under the impact of the movement, racial injustice, and many other forms of injustices, are now seen, by many people who never thought so before, as systemic problems. They cannot be made aright by, as Cornel West dismissively and well said, “putting Black faces in high places”. They  require a thorough rethinking of the essential features of capitalist societies. Moreover, BLM  movement, by bringing into the focus the entire colonial history and Black oppression, has directed our attention to the things which were thought long gone and “solved”: King Leopold’s rule of the Congo,  British use of and complicity in slave trade,  American and Brazilian slaveries that extended late into the second half of the 19th century. It is very likely that similar issues will be raised soon in other countries: France, the Netherlands, Portugal, Spain, Russia. As we have just seen, the statues of Christopher Columbus are tumbling down.

This is a huge ideological change. We were, until a few weeks ago, witnessing the same events as now—racial discrimination and police brutality are not exactly new—but  the ideological lenses through which we were seeing them were entirely different. As in the example of the Libertas flag, the event, the fact, was the same:  the understandings  different.

Ideologies we live are like the air we breathe. We take them as obvious. We are not aware of them, as I was not aware of my own  in 1975. Or as my friends were not aware of the ideology that pervaded the World Bank and the IMF in the last two decades of the 20th century. Neoliberalism (which did not use that name then) was so obvious, its lessons and recommendations so clear and common-sensical that it fulfilled the requirements of the best possible ideology: the one that a person defends and implements without ever realizing he is doing so. But it too is now falling apart.

When people ask me how it was to have worked in the  World Bank at the time of high neoliberalism, they often believe that we were somehow compelled to believe in the nostrums of neoliberalism. Nothing is further from the truth. Ideology was light and invisible for many; they never felt its weight. Even today I am sure that many friends who implemented it are unaware they ever did. In the early 1990s, an influential person, who would never consider him/herself “neoliberal”, strongly objected to any work on inequality: the issue was not inequality—on the contrary, we needed to create more inequality so that growth can pick up. Another influential person (Larry Summers in this case) became infamous by writing a memo that argued that pollutants should be shipped to Africa because the value of human life there is much lower than in rich countries. Although Summers later claimed that the memo was written in jest, it did capture well the spirit of the times. Yet another person who strenuously even now defends him/herself of the neoliberalist tag produced a new approach to a problem that, proudly claimed, solves it by creating a new market. Never having heard that commodification of everything is the basic characteristic of neoliberalism. No Polanyi or fictitious commodities in his world. 

Alike to religious believers, neoliberalism seemed to many economists a quintessence of reasonable, common-sensical ideas. John Williamson wrote when he defined the Washington consensus that it is “the common core of wisdom embraced by all serious economists”. Now that neoliberalism, under the shocks of 2007 and 2020, is all but dead, it is easy to see how wrong they were. But while it lasted, people lived in their own ideological worlds, “embraced by all serious economists”, and it seemed to them that everybody else did too. And that it would last forever.  As it seemed to me—in 1975.