Last September, Caijing magazine ran a cover story on Ma Zhaode, a director of the Industrial and Commercial Administration of Hainan province, who was accused of taking bribes from junior officials in return for promoting them. As it turns out, his was not an isolated case. Since then, cases of other officials caught trying to peddle promotions for cash have surfaced.
Because the problem is deepening and its social impact is grave, understanding it based on economic principles is vital to tackle the corrupt trade. From an economic point of view, official graft involves a perverse exchange of power for profit. More perverse still is the sale of bureaucratic titles, which can have much higher economic costs. That is because when officials engage in such transactions, often it is not the government positions themselves that they are ultimately after; rather, it is the opportunities for corruption - and money - that come with them.
In the garden-variety type of official corruption, the players are officials and businessmen, and the price is calculated based on the expected returns from a particular deal. But when it comes to payoffs for promotion, the players are higher and lower-ranking officials, and the transacted item is the 'rights to corrupt'. The price, in this case, is based on the expected returns from all potential corrupt deals, discounted to present value. According to this line of reasoning, money-for-more-power exchanges involve a chain of transactions, that is, the deals these promoted officials might do down the line with businessmen - or even other officials.
To the economic mind, a buyer will only pay the price of future cash flow when the expected return is high enough to warrant the gamble. Thus, the increasing trade in official posts may indicate household corruption, too, is on the rise. Stamping out this market for bureaucratic power is key to the national campaign against corruption, and developing a mechanism to stop the sale of government posts should be made a priority among reforms. This is where our economic model comes in handy. The underlying solution involves minimising the expected returns from the trade.
But there are only two ways to do it: by eliminating the current practice by which decision-making opportunities become virtual bonus options for bureaucrats; or by preventing officials from seeking and creating such opportunities.
With regard to the latter, given that the trade in bureaucratic titles spawns a tangled political web, using new powers to try to police existing ones arguably will not work. To stamp out corruption, the government must first commit itself to fulfilling its proper role in society and the market. It needs to set clear-cut boundaries between bureaucratic and market forces, and keep an arm's length between the two to prevent them from overlapping.