The ultimate cause of corruption

PUBLISHED : Monday, 03 November, 2003, 12:00am
UPDATED : Monday, 03 November, 2003, 12:00am

Amid an otherwise bright economic picture, China's property market stands out as a major source of worry. Property corruption represents the third great wave of corruption in China's reform period.

The first, in the late 1980s, saw officials profit from the discrepancy between state-mandated and market prices under the official 'two-track' system.

The second wave, in the mid-1990s, involved vast smuggling schemes, in which gangsters brought in billions of dollars worth of cars, steel, oil and consumer goods and bribed customs officials not to impose sky-high tariffs. Eventually, big smuggling rings in the southern ports of Xiamen, Shantou and Zhanjiang were broken up, leading to the imprisonment and, in a few cases, the execution of high-up municipal officials.

Both of these corruption waves, as well as the current one, share an ultimate cause. They were all driven by the existence of two widely different sets of prices: administrative and market. In the late 1980s, the two-track price system was official policy, a stepping-stone to a full market-price system.

Faced with high tariff rates of the 1990s, a time of rapidly-growing demand for industrial goods, corrupt officials and their smuggler friends in effect created a new, lower tariff rate that enriched them but also aided economic growth. Today, developers and officials profit from the huge gap between the high, market-set retail price of new housing and offices, and the absurdly low (often zero) wholesale price of land, set in closed-door deals between officials and developers.

The government's limited efforts to curb property-related corruption have, so far, been purely prosecutorial. Aside from the well-publicised detention of Shanghai property tycoon Chau Ching-ngai - also known as Zhou Zhengyi - which may have been politically motivated, inspection teams have gone to investigate property-market 'irregularities' in nine provinces plus Shanghai. Last month, the Minister of Land and Resources, Tian Fengshan, was effectively removed from his post, prompting speculation that he is under investigation for shady land dealings in his home province of Heilongjiang.

These measures are symbolically important, but do not constitute a solution. The solution is to introduce market pricing for land-use rights, and thereby close the price gap.

The stakes are not low. Outrage over official profiteering under the dual price system was a big ingredient in the brew of resentment that bubbled over in Tiananmen Square in 1989.

In their capacity to incite social unrest, today's property scandals more closely resemble the two-track pricing scandals of the 1980s than they do the smuggling of the 1990s. Corrupt land deals lead to the enforced relocation of thousands of families for little or no compensation. And perversely, they drive up housing prices, by encouraging speculation. Arresting a few malefactors is a start, but the problem will not be solved until land-use rights are seen as a scarce resource to be rationed by price - as most other goods are in China - rather than tasty cookies from a bottomless jar.

Research by the China Economic Quarterly