Jake's View

There's no proof that graft has harmed China's market development

PUBLISHED : Sunday, 01 June, 2014, 4:33am
UPDATED : Sunday, 01 June, 2014, 4:33am

Corruption has done immeasurable damage to China's market development. Prosperity cannot be built on a corrupt foundation.

Hu Shuli, Caixin Media
South China Morning Post Insight Page, May 29

For the avoidance of doubt and just to get things straight at the very beginning, I do not approve of corruption and I regard the theft of public assets as a crime. I repeat …

But this statement of moral position misses the point. The question here is rather one of practicality. Has corruption truly done immeasurable damage to China's market development? Is it truly impossible to build prosperity on a corrupt foundation?

The first thing to bear in mind about this is that corruption is a public sector phenomenon. It happens when A deals with B on C's account, which describes expenditure in the public sector. The bureaucrat deals with the contractor on the taxpayer's account. It does not and cannot happen when A and B deal on their own accounts, which is the private sector arrangement although, admittedly, the occasional crook dealing on the company account in large companies tries it. Invariably he discovers to his dismay that the chief financial officer's department has eagle eyes.

You may, of course, accuse the private sector party of being the common instigator of bribery in dealings with the public sector. My experience as an Asian investment analyst tells me the opposite is manifestly true. Whatever the case, the fact remains that the one constant of large-scale corruption is the presence of the public sector.

Now turn to what is happening in China. Here you have any number of state enterprises engaged in uneconomic activities, all the way from a high-speed railway system that cannot even recover its operating costs, to old- fashioned metal-bashing industries that need state support to stay alive and service industries that can only exist if granted a monopoly.

Just this past week, for instance, the news featured a state directive to local governments to speed up concrete-pouring projects in order to prop up the nation's published economic growth rate, which may otherwise slip below 7 per cent this year.

Inevitably a good deal of the money will be siphoned off in corruption. It is inevitable in an economy dominated by the public sector. But we are not talking here of the money that goes to fancy cars and fancy parties. Corrupt officials find it quite easy to charge these sorts of things to their normal state company accounts.

What we are talking of is big sums that find their way out of state accounts and are invested in private enterprises that are given a measure of insulation from state interference by their influential owners. These enterprises don't waste money. They are the efficient, money-making productive side of the Chinese economy. Freed of Beijing's misconceived investment decisions, they are the ones that really support growth and create jobs.

It was the same way in the old Soviet Union. Money sneaked out of state enterprises was used to set up small market enterprises that stayed under the Moscow radar and kept a crumbling economy stumbling along.

When the Soviet economy finally failed it was the entrepreneurs trained in the arts of evading the state who became the movers of the Russian economy. President Vladimir Putin then did his deal with them: stay out of politics and I shall let you keep what you stole.

Yes, it is morally offensive but that is the way of these things. In the formative stages of a market economy there is never much difference between criminal and private enterprise. The distinction evolves only gradually.

I do not advocate it but I do recognise it. The proceeds of corruption in a state-planned economy are often what funds the creation of the efficient and productive sides of that economy.

So, no, in my opinion corruption has not done immeasurable damage to China's market development, quite the reverse. And prosperity can in fact be built on a corrupt foundation. It is being done in China at this moment.