Governance & CSR: Efficiently corrupt

Corruption is endemic in China and yet the country has had an annual growth rate of about 10% over the past 20 years.

by Far Eastern Economic Review
Last Updated: 23 Jul 2013

The 'efficiency enhancing' corruption theory argues that corruption releases commercial activity in states where there are rigid anti-business regulations and thus spurs economic growth. However, it does not explain why some corrupt countries benefit from the 'efficiency enhancing' factor more than others.

In states such as China, there is a relatively high level of public trust through networking systems called guanxi. This means that the briber and the corrupt official can trust one another. The briber may have to pay first and then wait some time before receiving the public good he has asked for. The corrupt official will have to trust the briber not to turn him in or start blackmailing him.

These extensive networks enable complete strangers to trust one another because they will have been recommended to each other through close or distant relatives, friends or friends of friends. The level of such trust is so great in China that there is even a form of corruption based on the future, in which the corrupt official will expect to be rewarded once he retires. Clearly, this reduces the likelihood of being caught, but it also requires a greater degree of trust.

In contrast, in the Philippines public trust is much lower. The state has exploited its dominance in certain industries - such as coconut products, sugar and tobacco - to extort money from businesses trading in those sectors. Manuel Cojuangco, a friend and business partner of the then president Ferdinand Marcos, obtained money in this way in the coconut and copra sector during the 1970s (the sector represents 25% of the country's export income), as the head of the relevant government agency responsible for this industry.

Cojuangco used the money to buy banks that, in turn, helped to fund his acquisitions of coconut-oil pressing mills. He then used extorted tax revenue to subsidise the mills he and Marcos controlled.

In contrast to China, therefore, the briber was forced to pay corrupt officials money so that they could ply their trade, which in turn benefited the officials. This did not create new business activity; it merely allowed the existing business to take place at a heavy cost. Marcos and his associates amassed assets valued at between $3 billion and $6 billion.

Corruption will always be bad for economic growth, but the negative effects can be reduced where there is a high level of public trust. Also, the study suggests that it will be much harder to clean up corruption in high-trust societies such as China, because both parties so obviously benefit from the arrangement. Therefore, there is less incentive for the briber to report the corrupt official to the authorities.

Why China thrives despite corruption,
Shaomin Li and Judy Jun Wu,
Far Eastern Economic Review, Vol 170 No 3, April 2007

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