Presented by Angang Hu, Center for China Study, Chinese Academy of Sciences, Qinghua University

February 13, 2001

Corruption looms as one of the biggest political and economic challenges that faces China in the twenty-first century. Conservatively estimated at 13-16% of China's GDP, corruption is a huge economic loss and a "social pollution," contributing to problems such as environmental degradation, social and political instability, and decreased credibility of government officials. According to a survey conducted by this study, in 1998 and 1999, Chinese people viewed corruption as the number one factor contributing toward social instability. In 2000, fearful of the imminent pains of economic reform, Chinese people only named "unemployment and the fear of being laid off" ahead of corruption as the primary source of social instability.

In this study, the main methods of detecting corruption are studying rent-seeking behavior and corrupt activities and data either stated or implied by the government. The main types of corruption in China are tax evasion; rent-seeking behavior; involvement in the underground economy, where the management of the goods is legal, but the income is illegal; involvement in the underground economy, where the management of the goods is illegal; and the abuse of public investment and public expenditures. Corruption is particularly egregious in the railroads, aviation, telecommunications, and electricity production sectors.

First, tax evasion is the largest economic loss to corruption, accounting for 7.6-9.1% of GDP. Economic losses from lost tariff revenues are particularly large. In 1994, the official average tariff rate was 36%, while the effective tariff rate was only 2.73%. The loss of tariff revenue for the government was 7.1% of GDP. In 1998, the official tariff rate was 15%, while the effective tariff rate was 2.69%. The loss of revenue for the government was 1.7% of GDP. In 2000, the net economic loss from lost tariff revenue was 13.7% of GDP. Next, illegal management of public investment monies and public expenditures has made these activities the second largest economic loss to corruption, accounting for 3.4-4.5% of GDP. Third, rents from monopolies are the third largest economic loss to corruption, accounting for 1.7-2.7% of GDP. Rent-seeking behavior leads to a loss in consumer surplus and in social welfare. The main sources of rent-seeking behavior are dual track pricing, which is in decline; abuse of economic privilege and monopoly power; high import tariffs and quotas; and favorable government policies given to specific sectors or interest groups. Finally, income from the underground economy in illegal goods-smuggling, drugs, and trafficking-is the fourth largest economic loss to corruption, accounting for 0.4-0.5% of GDP.

The data on the punishment of government officials is also not encouraging. The probabilities of officials getting caught and punished are both small. At the ministry level, the chance of corrupt officials getting caught is about 1 in 10. The rate is about half of that for county level officials, where 90% of corrupt officials operate. Of those that get caught, the number of officials that get sentenced by criminal courts is about 6.6%, a negligible number. The intrinsic problem here is that the penalty for corruption is too light while the risks of engaging in corrupt activities are also too low.

The Chinese government has taken numerous measures to fight corruption. These measures include forbidding the government, police, and military to take part in business enterprises; implementing different accounting channels for revenues and for expenditures; and implementing a system of "accountant accreditation." Broadly speaking, this study puts forward six anti-corruption policy recommendations: (1) increasing transparency of government affairs; (2) encouraging citizen participation in government affairs; (3) strengthening the role of the deputy of the People's Congress; (4) ensuring an independent judiciary; (5) holding major government officials responsible for mistakes made under their purview; and (6) broadening the freedoms of the media. In addition, governmental interference in the economy and the discretionary power of government officials should be reduced.

Thus, one of the most difficult challenges for furthering anti-corruption activities in China will be engaging the Chinese Communist Party (CCP). Currently entrenched in special interests, the Chinese government must democratize its internal affairs. Collusion among the CCP, judiciary, police, and mafia must end. Not enough research has been done on how this transition should occur and what its consequences will be. Hopefully, the transition will be a proactive, peaceful one brought about by forward-looking CCP officials.

However, as government reform proceeds, it must not turn into a power struggle among elites in the central government. To deal with the possible politics of fighting corruption, strong institutionalized rules of behavior must be set up for high-up leaders and politicians before which they are absolutely equal. Having consistent rules will not only increase the transparency of the transition process, but it will also increase people's confidence in and the credibility of political leaders.

One of the most vociferous arguments that Chinese government official will present to thwart economic and political reform is that they will forgo fast reform in order to maintain stability. However, corruption itself leads to social, economic, and political instability. If economic development continues without reform, corruption will deepen and ultimately retard China's development.

Summary prepared by Radha Kuppalli, Junior Fellow.