How Does Corruption Hinder China’s Development?

How Does Corruption Hinder China’s Development?
How Does Corruption Hinder China’s Development?
How Does Corruption Hinder China’s Development? Top
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    Gauging Corruption in China

    The inherent secrecy surrounding corruption makes it almost impossible to measure with complete accuracy. The Corruption Perception Index, published by Transparency International, aggregates a diverse range of surveys to assess the perceived level of corruption within a country.1 The 2018 CPI ranked China 87 out of 180 countries with a score of 39, placing it in a tie with Serbia.

    This level of corruption is far greater than that of most high-income economies. The countries with the least corruption are typically smaller, advanced economies. Denmark and New Zealand, for instance, are ranked 1st and 2nd in the 2018 index. Larger developed states also rated well, with Japan (18th) and the US (22nd) both near the top of the list. Regarding its developing peers, China outperformed Brazil (105th) and Russia (138th) but fell behind South Africa (73rd) and India (78th).

    Robust democratic institutions are also associated with lower levels of corruption. Full democracies received an average score of 75 in the index, while fully autocratic regimes only averaged a score of 30. Citing “threats to its system of checks and balances” and an “erosion of ethical norms at the highest levels of power,” the US dropped 4 points in the most recent index and fell from 16th place in 2017 to 22nd in 2018.

    In 2017, the Worldwide Governance Indicators project ranked China in the 47th percentile globally for the “control of corruption” category.

    Perceived corruption in China was at its highest level in 2014, when it ranked 100th globally in the CPI with a score of 36. This trend marked a significant drop from 80th place in 2013 and 2012. Between 2015 and 2017, China improved slightly in the CPI, before its score declined by 2 points and its ranking slid from 77th place in 2017 to 87th in 2018.

    Other indexes reflect a small but positive trend for China. In 2017, the Worldwide Governance Indicators project ranked China in the 47th percentile globally for the “control of corruption” category, which examines the extent to which public power is leveraged for private gain. While this marked a minor decline from 2016 (49th percentile), it is overall an improvement from 2012 (40th percentile). The 2017 Index of Public Integrity likewise reported a slight uptick in all categories measured for China since 2015, except for budget transparency.

    Importantly, the nature of corruption varies by country. Transparency International contends that the most prevalent forms of corruption in China are bribery, diversion of public funds, and favoritism by government officials. A 2015 survey conducted by Charney Research revealed that 35 percent of Chinese companies had paid bribes to government officials.

    Bribes are pervasive in other areas of Chinese society as well. The 2017 Global Corruption Barometer (GCB) found that when accessing public services — such as those related to education, health care, and the criminal justice system — 26 percent of respondents in China had paid bribes. This level is far below that of some of China’s developing neighbors, with 69 percent of Indian and 65 percent of Vietnamese respondents reporting having paid bribes when accessing public services. Thailand and Myanmar fared better, at 41 percent and 40 percent, respectively. Only 3 percent of South Korean and 0.2 percent of Japanese respondents reported instances of bribery.

    Some corruption-related activities in China have declined. The 2017 – 2018 Global Competitiveness Index, which measures country-level economic competitiveness, ranked China 49th out of 137 countries in the frequency of irregular payments and bribes and 20th in favoritism by government officials. By both measures, China improved considerably since 2012 when it ranked 67th in irregular payments and bribes and 34th in favoritism by government officials.

    The Impact of Corruption on China’s Economy

    Corruption can impose economic damages both directly, such as in cases of tax evasion, money laundering, and other illicit activities, and indirectly by distorting market mechanisms, increasing the cost of business, and discouraging competition. In a 2018 report, the United Nations suggested that corruption across the world cost at least $2.6 trillion, or 5 percent of the global GDP. The same report also noted that businesses pay more than $1 trillion in bribes every year.

    The cost of corruption on a country’s economy is difficult to calculate. A 2016 study of corruption across Europe showed lower levels of economic losses in mature economies like the Netherlands (0.76 percent of GDP) and higher losses in middle-income economies like Romania (15.6 percent of GDP). For China, the picture is less clear. One calculation from 2001 pegged the cost of corruption at 14.5 to 14.9 percent of China’s GDP (annually) between 1999 and 2001. A more recent estimate from 2010 put the financial cost of corruption for China at 10 percent of its GDP.

    In countries like South Korea, corruption has yielded mix results. Although corruption can compromise government effectiveness, it has also been shown to spur growth and promote the formation of multinational conglomerates like Samsung. The relationship between economic growth and corruption in China is difficult to assess. Throughout the 1990s and 2000s, China enjoyed rapid GDP growth despite widespread corruption. This is, in part, a result of what Transparency International refers to as a “profit sharing” model of corruption, whereby government officials are evaluated based on their ability to hit growth targets set by Beijing. As a result, officials are incentivized to support economic development even if corruption is pervasive.

    Illicit Financial Flows for Select Countries (2014)
    Country Low Estimate (millions $) High Estimate (millions $)
    China $689,000 $1,119,600
    Russia $180,200 $297,700
    Mexico $167,400 $200,900
    India $46,700 $124,500
    Brazil $33,400 $76,330
    Source:Global Financial Integrity

    The outflow of capital due to tax evasion, smuggling, and other illicit activities provides additional insight into the economic consequences of corruption. In 2014, illicit financial flows to and from developing countries reached upwards of $3.5 trillion.2 Illicit flows to and from China topped $1.1 trillion in that year, significantly more than Russia ($299 billion), India ($122 billion), and Brazil ($76 billion).

    Bribery likewise imposes significant challenges for China. Official government figures show that of the officials arrested in 2018 for corruption, 17 people received bribes of at least $1.47 million (10 million yuan) and five had taken bribes of $14.7 million (100 million yuan) or more. In one instance, the vice chairman of the Hebei People’s Congress, Yang Chongyong, was found guilty of accepting bribes totaling roughly $30 million (206 million yuan) in September 2018 and sentenced to life in prison.

    Bribes have also been shown to find their way into the hands of tax collectors, which has made eliminating tax evasion a challenge for Beijing. According to the World Institute for Development Economics Research, tax evasion costs China $66.8 billion annually. To help root out evaders, China implemented the OECD’s common reporting standard that provides Beijing with information on assets stored overseas. China has also begun targeting the entertainment industry, where fake contracts have been used to evade taxes. In a recent high-profile case, Chinese actress Fan Bingbing and her companies received fines of $127 million in back taxes and penalties.

    Bribes Paid by Chinese Firms by Sector (2015)
    Sector Percentage
    Real Estate & Construction 41%
    Manufacturing 36%
    Services 35%
    Retail 34%
    Transportation 32%
    Source:Charney Research

    Some sectors are more affected by corruption than others. Charney Research reported in 2015 that 41 percent of respondents in the real estate and construction sector paid bribes. A separate study of over 7,300 corruption cases from 2014 to 2015 discovered that a notable portion of real estate corruption occurs on a village level, where bribery and embezzlement can take place during land development projects and other activities.

    Prevalent corruption can hinder economic competitiveness and disincentivize foreign investment. Smaller firms operating in China have been shown to be less profitable and productive when competing against larger peers that can allocate more toward “entertainment expenses,” which in some cases has been linked with bribes and other forms of corruption. A 2017 survey of over 16,000 business executives across 140 countries showed that corruption was one of the biggest challenges for conducting business in China, behind inefficient government bureaucracy, inflation, and policy instability.

    Chinese citizens have consistently ranked corruption among their top concerns in various surveys. The 2013 China General Social Survey, for instance, stated that over 71 percent of respondents felt corruption was “extremely serious” or “very serious.” A 2016 Pew Research Center survey noted that 49 percent of respondents reported that corrupt officials are a “very big problem,” significantly higher than other concerns, such as the country’s wealth gap (33 percent) and crime (23 percent). Results from earlier Pew studies show that this concern is persistent, with 50 percent of respondents in 2012 reporting that corruption is a “very big problem.”

    Efforts to Combat Corruption in China

    Beijing first criminalized corruption in 1952, but it was not until 1979 with the adoption of the Criminal Law of the People’s Republic of China that anti-corruption laws were officially codified. This process stipulated that “taking advantage of [one’s] position” was a crime and made key distinctions between bribery and embezzlement.

    New laws were introduced in the 1990s to further combat corruption. These included the Civil Procedure Law in 1991, the Arbitration Law in 1994, and revisions to the existing anti-corruption laws in 1997. Collectively, these laws (among others) refined the definitions of and expanded the punishments for corruption.

    As the Chinese legal system evolved to tackle corruption, the number of high-level officials prosecuted and the amount of money involved in corruption cases surged. In 1994, 1,915 high-level officials were charged with corruption, and the total amount of money involved in these cases totaled $395 million (3.4 billion yuan).  In 2007, the number of high-level officials prosecuted had jumped to 2,706, and the assets involved had roughly doubled to $882 million (6.7 billion yuan).

    To further enhance Beijing’s anti-corruption efforts, then-President Hu Jintao established the now-defunct National Bureau of Corruption Prevention (NBCP) in 2007. The NBCP was charged with preventing corruption, improving government transparency, and building an online forum through which citizens could issue complaints. It also cooperated with international counterparts on multilateral initiatives. For instance, a 2016 agreement between Beijing and Islamabad facilitated the NBCP working with Pakistan’s National Accountability Bureau to combat corruption along the China-Pakistan Economic Corridor.

    At the opening of the 18th Party Congress in November 2012 — just days before the end of his second term as president — Hu warned that failing to handle corruption could “prove fatal to the party and even cause the collapse of the party and the fall of the state.” Soon thereafter, newly-elected President Xi Jinping launched a comprehensive anti-corruption campaign and called on the party to resolutely investigat[e] law-breaking cases of leading officials.” By October 2018, Chinese authorities were reported to have investigated 2.7 million officials and disciplined over 1.5 million individuals, including seven national-level leaders and two dozen high-ranking generals. Around 58,000 officials have been brought to trial, with two ultimately being sentenced to death.

    Xi Jinping also launched Operation Fox Hunt in 2014 and Operation Skynet in 2015 to locate and extradite corrupt officials and other criminals who had fled overseas. In 2015, the CCDI issued over 100 Interpol Red Notices on Chinese individuals living abroad. By January 2019, roughly 5,000 suspects had been arrested and returned to China.

    In addition to strengthening anti-corruption measures, Xi also widened the scope of government supervision. In 2018, China established its highest-ranking anti-corruption agency, the National Supervisory Commission (NSC). The NSC took over some of the duties of the CCDI, replaced the Ministry of Supervision and the NBCP, and is reported to have tripled the number of individuals monitored by the government. Individuals of interest include not only party members and government officials, but also numerous state employees, such as management-level public servants in hospitals, cultural and educational institutions, and sports organizations.

    Xi’s anti-corruption campaign has recovered a significant amount of assets lost to corruption, although the exact amount is unknown. Xinhua reports that Beijing recovered $1.48 billion between 2012-2017. NBC claims that another $519 million was recovered in 2018. Chinese authorities are reported to have seized over $14.5 billion in assets from Zhou Yongkang and his associates alone. Zhou, a member of the Politburo Standing Committee from 2007 to 2012, pleaded guilty to taking bribes and leaking state secrets. He was sentenced to life in prison in 2015.

    Although Xi announced in a 2018 speech that the “anti-corruption campaign [had] delivered a crushing victory,” it is unclear how effective his efforts have been at reducing corruption-related activities. China’s CPI score has remained below the global average since Xi came to power. When asked about the change in the level of corruption over the last three years, 73 percent of Chinese respondents in the 2017 Global Corruption Barometer answered that corruption had increased. Some observers have suggested that comprehensive structural reforms may be needed to truly root out corruption. ChinaPower