Costs of corruption far outweigh benefits

Some of the 100 most-wanted corrupt Chinese officials who have fled overseas. Please click here for a full list of the 100 fugitives. [Photo/China Daily]

President Xi Jinping's anti-corruption campaign, which has already brought down many "tigers" (corrupt high-ranking officials), has been widely touted as a key component of the deep structural reforms that China needs if it is to build a more sustainable, inclusive and market-based economy. But worries abound that, in a country where government officials play a major role in promoting economic growth, rooting out corruption might undermine prosperity.

Some have cited the recent struggles of luxury hotels and restaurants (which, in China, depended heavily on government spending) as evidence that the anti-corruption campaign is discouraging growth-enhancing activity. But the decline is likely to be temporary, with new groups of customers emerging after a period of adjustment.

A more credible concern is whether efforts to root out corruption weaken the incentive for government officials to promote growth. After all, high levels of growth translate into large rents that can, through corrupt practices, be distributed among officials themselves, as well as passed on to their friends and protégés. Eliminate such practices, the logic goes, and officials will be unable to reap large rewards from economic growth and thus will be less motivated to encourage it.

But this argument is far from airtight. Among the most common forms of corruption is the "sale" of government positions - a practice that has little to do with growth, especially when it is conducted by high-ranking military officers, such as those arrested during the campaign for trading promotions for bribes.

Another major concern is that, if businesses are no longer able to "grease the wheels" - that is, bribe officials to allow them to circumvent excessive regulations - their performance could suffer. And, indeed, even after 30 years of reform, China's economy remains bound by red tape, which drags down productivity considerably.

But there are holes in this logic, too. Most important, for such bribery to boost economic growth in any significant or sustainable way, it would have to be conducted by a wide range of businesses - not just the wealthiest and best connected. That is not the case today; most Chinese officials who have been charged so far have taken bribes from a single business entity, thereby allowing it to acquire a monopoly position.

So, while bribery in China may facilitate growth to some extent, it does not produce the kind of competitive business environment that supports long-term gains. The reality is that corruption imposes a large, often random, tax on businesses, not least by discouraging officials from reducing red tape for all enterprises - a move that really would boost growth.

The conclusion is clear: the costs of corruption far outweigh the benefits - and not only in China. Since World War II, many countries have attempted the transition from low-to high-income status, but only 13 have succeeded - and all had relatively low levels of official corruption.

The author is director of the China Center for Economic Research and dean of the National School of Development, Peking University.

Project Syndicate