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).

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