The silver lining to the corruption that exists at the intersection of state power and business development in China is that it has greased the wheels that are taking a state-controlled communist country into the free market world. However distasteful, corrupt practices have helped bring large amounts of state-owned assets into a market world.
Such heretical thoughts come to mind in light of the Organization for Economic Cooperation and Development's recent report warning that corruption is having a serious negative impact on business activity in China. It calls on companies to enforce their own anti-bribery measures, and on governments to "set up and strictly enforce accounting standards to improve transparency of company accounts; to strengthen independent external auditing controls to help prevent and detect acts of corruption; and require auditors to report suspicions of bribery to competent authorities."
These are reasonable requirements. The era in which corruption plays a role in offsetting the dead hand of the centrally planned economy is plainly coming to an end. Today, corruption is far more detrimental than useful. But meanwhile, the assets that have been transferred into the market economy even by unsavory means are subject to the kind of rigorous regulatory regime the OECD is calling for, and which China absolutely requires.
Corruption runs deep
There is much to be done in dismantling the practices and psychology of corruption, which run deep. But it is also important to recall that China is a big ship and is slow to answer the helm.
It has been the case for centuries that Chinese officials enrich themselves with a moderate "squeeze" as a recognized job benefit. Changing the nature of the incentives and job benefits is the key. For example, senior state enterprise managers earning RMB 10,000 (US$1,200) a month in some cases run businesses with tens of millions in turnover, and negotiate massive deals with rich businessmen. These officials and state enterprise managers have no official stake, no shares, no upside in the deal, while they see, or imagine, the businessmen on the other side of the table making mountains of money. Is it any wonder that they are prone to request something on the side for themselves as part of the deal? officials and state managers – the people who control the state assets and approvals – need to be properly recompensed for their role. Better salaries are one way, shareholdings are another.
There is also an ameliorating role of corruption's built-in obsolescence to assist in the cleanup too. The corrupt approach very often doesn't work in the long term for the businessman either, because buying one official is of no use when that official is transferred or retires. Deals worth doing are usually long-term and extend beyond an individual's tenure in office.
A key problem with anti-corruption activity in China today has always been its randomness. One official is executed for what another hundred officials are also doing. This breeds cynicism. Anti-corruption laws and regulations, which are already more than sufficient to handle the problem, need to be more consistently employed. The system of corruption crackdowns, traditionally favored by China, in which explosions of official and judicial rage result in dispatching numbers of suspected miscreants as examples to all, was specifically targeted in the OECD agenda before the Beijing conference began. While no reference to the subject appears in the joint communique issued afterwards, it is clear from the other steps approved by China that a more conventional approach to corruption prevention is underway and will emerge in a more settled form in due course.
This feeds into the wider issues of rule of law, transparency, accountability and corporate governance. China has made much progress in this area, as it moves down the channel towards a more just, open and consistent administration. There is still a long way to go, of course, but the pressures from ordinary people, the middle classes, entrepreneurs, foreign investors and stock market investors are all pushing the system inexorably in that direction.
It must also be acknowledged that graft is less burdensome on business in China than in many other places in Asia, and also less visible. The petty corruption of old China is largely unknown today. But on the other hand, the nefarious connections between greedy officials and grasping property developers have created many a towering monument to corruption in China's cities.
A strategic blindness will likely linger with regard to corruption, but as assets move from the murk to the market, world-class standards inevitably strengthen their hold. Transparency does not stop greed, but it surely helps in controlling it. And as the rule of law takes hold in the corporate arena, one dares hope that its impact will be extended to wider applications in civil law and the criminal justice system as well.
Birth is seldom pretty. And the birth of a new capitalist system is not so different. The baby is streaked and bloodied, its head misshapen. But all will straighten out in time without too much intrusive action. In the case of China's infant capitalist market, mother and child are doing pretty well, and overall, the little tyke is looking stronger every day.