Moderate your Greed

Sta. Ana coordinates Action for Economic Reforms. This article was published in the September 7, 2009 edition of the BusinessWorld, page S1/4 to S1/5.

A recent article from The New York Times (Politics Permeates Anti-Corruption Drive in China by David Baboza, 4 September 2009) reports about the arrest of high-ranking Chinese Communist officials and a young billionaire businessman.

The businessman, a 39-year old entrepreneur was ranked in 2008 by Forbes magazine as China’s second richest man. One of the unnamed arrested officials, the head of the huge and modern Beijing’s international airport, was already executed.  Talk about swift justice.

These high-profile arrests are not isolated.  They are part of a bigger effort to combat widespread corruption in China. Every year, says the report, “about 150,000 officials [are] being punished…for bribery, corruption and other offenses.”
The anti-corruption campaign does not protect even the leading Communist Party officials. A Politburo member, the mayor or Party secretary of key cities like Shanghai and Shenzen, and heads of strategic state-owned enterprises have been ousted, imprisoned or even shot because of corruption.

The anti-corruption drive does not spare the private sector either, including multinational corporations.  Recently, Chinese authorities arrested four employees of Rio Tinto, a British-Australian mining corporation, for bribery.

The author of The New York Times article wants to highlight the view that the anti-corruption drive is motivated by politics and factionalism within the Communist Party.  That those being targeted are political challengers.  To quote the article: “But analysts say that prominent cases in China are often the outgrowth of political struggles within the Communist Party, with competing factions using the ‘war on corruption’ as a tool to eliminate or weaken rivals and their corporate supporters.”

My response is: So what?  The intention—the wish to destroy political opponents, is incidental.  What matters is the outcome—that corrupt officials are being punished.  This in turn helps curb corruption.

Given the weakness of the rule of law or the lack of formal institutions in China, the competition within the Communist Party serves to check massive corruption.

The Barboza article nevertheless points out that the anti-corruption drive is selective in its enforcement.  But again, in the Chine context of immature legal (formal) institutions, so what?  The point is that the competition between factions keeps the contending parties on their toes. After all, the outcome of the competition in the Party is unpredictable.  In one period, one faction is dominant.  But a twist can lead to the ascendancy of the other faction.

Hence individuals from the competing factions who wish to be spared from the ignominy of being labeled traitor or worse, being shot by a firing squad, would have to avoid engaging in big or high-level corruption.

To repeat, 150,000 officials and cadres are being punished every year.  Some are executed, something that I don’t like but admittedly something that can strike fear among the corrupt.  In contrast, in the Philippines, which supposedly enjoys the institutions of liberal democracy like an independent judiciary, corruption cases against the likes of Nani Perez, Joc-joc Bolante and Ben Abalos cannot prosper.

Undeniably, there’s a lot of corruption in China.  But how come despite rampant corruption, it has been able to sustain high growth rates, even during times of global crisis?

Some scholars have pointed out that as long as corruption is predictable and that rules governing corruption prevent it from spiraling (very high transaction costs.), it does not become a binding constraint on investments and growth. (See for example the volume edited by J, Edgardo Campos, The Boom and Bust of East Asia: Corruption, 2001.)

In China’s case, corruption is predictable.  Investors can bribe officials with the assurance that the commitment will be delivered.  Again, compare the situation to the Philippines.  Even if the bribe has been paid, the investors remain uncertain about the outcome of the contract.  Recall the Fraport case or even the notorious National Broadband network deal.

China has the advantage of making corruption predictable by having a strong, centralized one-party state.  In short, there is just one veto point. The bribing investors do not have to deal with several parties in getting their licenses or contracts approved. China is an example of a “monopoly supplier.”

In contrast, the Philippines has several players (“independent suppliers”), leading to inconsistent rules and higher transaction costs.

For example, even during the Cory Aquino administration, the perception was that corruption was rampant.  There was the Kamag-Anak, Inc, and many of her appointees embezzled funds and looted government assets.  The restoration of democracy led to the redistribution and decentralization of corruption.

To stop corruption, then Public Works Secretary Ting Jayme, a clean and honest person, slowed down infrastructure spending.  More infrastructure projects would have meant more cases of corruption. But of course this had a serious repercussion on the economy.

Under Gloria Arroyo, despite her monopoly of the big-ticket items, she allowed corruption at all levels to reward political allies.  Further, as part of rewarding her allies and monitoring the bribes collected, she created bodies supposedly to check what other agencies are doing.  But in practice, this has led to more corruption and uncertainty as competing groups are demanding bribes and reversing decisions.

An illustration of this is the creation of the Presidential Anti-Smuggling Group, a redundant outfit, which now competes with the Bureau of Customs. This is a classic case of having “independent suppliers,” leading to increased corruption and heightened unpredictability.

We can learn from China. We need not necessarily undertake reforms that will supposedly eliminate corruption. The lesson is to make corruption predictable and constrain it. To quote again The New York Times article: “The current crackdown is to send a message to officials who overstep some unknown acceptable level of graft.”

In China, even as corruption is a way of life, measures are in place to put it in check—including execution! We don’t need executions in the Philippines.  Just jail the perpetrators, especially the most powerful ones.

And Romy Neri is right at least in this instance: “moderate your greed.”

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