By Zhao Kang
December 28, 2010
Transparency International has released its annual Global Corruption Barometer. Surprisingly, it shows that less than 10 percent of Chinese people paid a bribe in the last 12 months, ranking China among the less corrupt countries in the world.
Broadly, the chart shows that countries with a higher level of economic development have a lower level of corruption. Following this logic, since China is developing fast its ranking is about right. But many people are unconvinced. They think the ranking underestimates the level of corruption in China. And in fact, the key to understanding corruption is not to relate it to the level of economic output, but to the development and maturity of institutions.
The key to maximizing commercial efficiency lies in the transformation of institutions, according to the Nobel Prize winning economist Douglass North. The essential transformation from a traditional economy to a modern economy is the introduction of impersonal exchange – the basic principle of the market economy. In a market economy, by voting with our feet we realize the most effective and rational allocation of resources. But in today's China, too much power remains in the hands of high status individuals. If you want to get things done you have to deal with these individuals. And bribery is the inevitable result.
China is in a period of social transition from a pre-modern to a modern economy. But the government chose a gradualist path to economic reform that did not immediately get rid of personal factors in trade. This left space for rent-seeking and nepotism. As a result, ordinary people in China have become very familiar with the practice of bribery.
If we simply take the view that commercial efficiency is in inverse ratio to corruption, the way out might seem to be to develop the economy. And naturally our model of economic development is the developed countries. But history has proved that simply repeating the experience of developed countries is not only impossible, but may also have negative consequences. From the perspective of institutional economics, the way to curb bribery lies in developing institutional arrangements that underpin impersonal exchange.
These institutional arrangements are both political and economic. Constitutional government means reining in the power of officials and restricting political malpractice. In terms of the economy, the main thing is to clearly define property rights. For improvements in the political field, we must wait for future reforms. And improvements in defining property rights depend on all levels of society developing an understanding of these rights and their importance.
What is the relationship between property rights and bribery? According to Peruvian economist Hernando De Soto, one of the main problems facing poor people is that they do not have clear title to their property. Their houses are built on land without clear ownership records, and their companies are not legally incorporated. The result is that, faced with complicated approvals needed to engage in trade, they must resort to bribery.
The point of defining property rights is not to exclude poor people – although this may be a dream of the rich. Rather, clearly delimiting property rights clears the path to the realization of the "open access social order" advocated by Douglass North that will draw more and more people into the global marketplace.
Examining the status quo in China reveals we have a long way to go. Let me cite an example from my personal investigations in Wenchuan following the devastating 2008 earthquake. The quake destroyed most of the buildings in the town. In the process of rebuilding, the first problem was to establish property rights. One problem that emerged was that many people who did not have official local residence permits and could not prove ownership of their homes, were not allocated houses despite having contributed to the construction of Wenchuan. Another problem was that, in allocating compensation, the government took no account of improvements made to the land by its owners. In interviews, villagers told me that when the land was originally distributed, most farmers chose cultivable land. No one took out contracts on the barren mountainside land. That was allocated to village officials who were not engaged in agricultural production. But when it came to paying compensation, the government allocated new land based on the original contracted acreage. The result was that peasants who had improved their land were inadequately compensated, while village officials, who had essentially done nothing, received more.
This net result was to undermine productive effort and to boost non-economic consumption. The compensation people received was just a matter of luck, unrelated to effort. Villagers told me that some people were allocated millions in compensation and blew it all on entertainment and gambling. They didn't use the money to invest, which would have improved economic output.
The reason for examining Wenchuan in discussing property rights is that the town was rebuilt from scratch and this represented an opportunity to break from the existing institutional structures and build a new and more flexible definition of property rights that would take into account the role of improvements made by landholders.
To build this more flexible definition of property rights will not be easy. It requires legal innovation and corresponding reforms in government institutions. But it is a precondition for realizing the impersonal exchange associated with a modern economy. Only when such institutions have been built, will we thoroughly eliminate bribery and corruption.
The author is a researcher with the Institute of Journalism and Communication of the China Academy of Social Sciences.
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