Thursday, December 25, 2008

Graft: Death by a thousand cuts

Dec 25, 2008

By Ching Cheong

When patriarch Deng Xiaoping sent Chinese troops into Tiananmen Square to crack down on students demonstrating against corruption in 1989, the message he inadvertently sent was: Corruption is preferred to political reform. His successor Jiang Zemin inadvertently reiterated the same message with his often-repeated slogan: Stability overrides everything.

Corruption remains a big challenge for China's current leaders. During the first decade (1978-87) of China's opening, there were about 200,000 corruption cases; in the second decade, the figure more than doubled. In the 1998-2007 period, it fell to about 300,000, after strenuous efforts by the top Chinese leadership.

In the mid-1980s, officials were still referring to corruption as 'incorrect tendencies'. By the mid-1990s, the Chinese Communist Party's then-No. 2 Li Peng was forced to admit that corruption threatened to wreck both the party and the state.

A comparison of the reports to the National People's Congress (NPC) by the Supreme People's Procuratorate (SPP) at different periods is illuminating.

The SPP's report to the 7th NPC (1988-1992) put the number of officials prosecuted for corruption at 95,818. Its report to the 10th NPC (2003-2008), indicated the number had grown to 209,487. The number of senior officials of provincial and ministerial rank who were prosecuted rose from five to 35. The number of cases involving sums exceeding one million yuan (S$211,000) increased from 81 to 35,255.

Various international corruption indices in recent years have indicated the worsening trend. According to the Transparency International index, China's ranking dropped from 52nd in 1998 to 72nd this year. The World Bank's World Governance Indicators (WGI) showed that the Chinese government's ability to contain corruption weakened from -0.15 in 1996 to -0.66 last year. The scale is from 2.5, being the top score, to -2.5, the lowest.

According to Dr Pei Minxin, a senior associate of the Carnegie Endowment, there was only a 3 per cent chance of corrupt officials being jailed in the 1990s. This made corruption a low-risk, high-return venture.

According to an internal directive issued by the SPP in 1999, procurators had to seek permission from a higher level party committee to investigate a party official.

The cost of corruption has been enormous. Dr Pei estimated that the direct cost could be as much as US$86 billion (S$124.5 billion) annually, or 3 per cent of the country's gross domestic product (GDP). A joint report by the Chinese Academy of Science and Qinghua University put the figure much higher - from 0.8 to 1.2 trillion yuan, or 13 to 16 per cent of GDP.

According to a Commerce Ministry research institute, some 400 corrupt officials have fled overseas over the past three decades with more than US$50 billion. Small wonder that the 'error and omission' item in China's balance of payments account has widened to a staggering US$16.4 billion last year. That's no rounding error. The Bank for International Settlement has suggested that much of it consists of illicit capital flight.

There are other costs to the Chinese economy. For example, due to the practice of buying and selling official posts, the size of government keeps swelling despite periodic trimming exercises. Currently, there are about 46 million government officials, and the population-to-officials ratio is running at an all-time high of 26:1. In 1998 and 1988, the ratios were 40:1 and 67:1, respectively.

The indirect costs of corruption are incalculable.

First, it has seriously compromised the CCP's prestige.

Second, corruption has hampered sound governance. China has remained in the bottom half of the World Bank's WGI throughout the past 30 years.

Third, corruption has widened the income gap. Professor Chen Zongsheng of the Centre for Studies of Political Economy at Nankai University, in Tianjin, has shown that corruption had exacerbated income disparities. In the decade after the 1989 crackdown, the Gini coefficient rose from 0.34 to 0.41, reflecting a widening income gap. Corruption alone contributed to 9.32 per cent of the bigger gap.

Fourth, corruption has increased the risk of social instability. Last year, Dr Hu Angang, director of the Research Centre for National Conditions at the Chinese Academy of Science, identified six factors contributing to growing social instability in China. He found that corruption was the second most important factor, after mob unrest.

Dr Pei has rightly warned: 'Corruption has not yet derailed China's economic rise, sparked a social revolution or deterred Western investors. But it would be foolish to conclude that the Chinese system has an infinite capacity to absorb the mounting costs of corruption. Eventually growth will falter.'

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