China’s Gilded Age: a fantastic new book from Yuen Yuen Ang

July 9, 2020

     By Duncan Green     

A new book from Yuen Yuen Ang is always a cause for celebration. How China Escaped the Poverty Trap, is a brilliant application of systems thinking to the biggest development story of the last half century (review and podcast if you haven’t already digested it).

Now she’s turned her attention to a massive conundrum and gaping hole in a lot of Western political science. China’s Gilded Age explains how China’s turbocharged economic and social transformation has coincided with massive corruption, when all the poli-scis nod sagely and insist that corruption is toxic for growth. Oops.

She’s incredibly thorough – digging into official stats, media reports, interviewing 400 people and building new databases from scratch to lift the veil on an elusive issue – how corruption works under autocracy. She’s also a brilliant writer, so all I’ll do here is print some extracts. If you want to read a review, you could do worse than read Branko Milanovic. But here’s Yuen Yuen Ang in her own words:

The health warning: ‘Readers should be skeptical of any argument that either hails or bashes China. Paradoxes are the most consistent trait of the reform-era Chinese political economy. Understanding it requires that we underscore and grasp these paradoxes.’

The starting point: ‘What’s truly extraordinary about China is that no similarly corrupt country has come anywhere close to reaching its scale of economic expansion….. many thriving economies tanked under corrupt governments; the Philippines under Ferdinand Marcos is a case in point.’

Cracking the paradox: ‘Not all corruption is equally damaging. Indeed, certain kinds of corruption may stimulate growth in the short term yet produce serious risks and distortions.’

A great 2×2 shows 4 different kinds of corruption

‘Petty theft refers to acts of stealing, misuse of public funds, or extortion among street-level bureaucrats.

Example:  In Bangkok, Thailand, complaints about police shakedowns are on the rise. As an anti-corruption politician puts it, “If you go to Sukhumvit Road, you can see the police looking for tourists who are smoking or drop a cigarette butt, then they ask for their passport and make them pay 2000 baht [just over US$60].”

Grand theft refers to embezzlement or misappropriation of large sums of public monies by political elites who control state finances.

Example: Sani Abacha, the military dictator of Nigeria, siphoned an estimated US$4 billion from the central bank into his overseas accounts, which is nearly 10 percent of the country’s entire GDP of $55 billion in 1998, the year he left office. Recently, Swiss authorities recovered and returned US$300 million of the “Abacha loot” to the Nigerian government.

Speed money means petty bribes that businesses or citizens pay to bureaucrats to get around hurdles or speed things up.

Example: In India small shops shutter despite a booming retail market because, as one retailer lamented, “It’s not possible to do business without greasing palms, without paying bribes.” A typical supermarket must obtain a daunting list of 40 permits, forcing retailers to bribe many officers in order to get these permits faster, which cuts into their thin profit margins.

Access money encompasses high-stakes rewards extended by business actors to powerful officials, not just for speed, but to access exclusive, valuable privileges.

Example: Ji Jianye, former Party secretary of Yangzhou city, received hefty gifts, bribes, and company shares from his long-time cronies in exchange for near-monopoly access to government construction and renovation projects. Within six years of Ji’s tenure, their company’s profits multiplied 15-fold. But as soon as Ji was investigated for corruption, its share price fell.’

She adds further insight through an analogy to different kinds of drugs.

It is the steroids of Access Money that holds the key to China’s boom, as she explains in her summary of the key arguments:

‘How did China evolve a more growth-friendly structure of corruption? China’s political system operates on a profit-sharing model. Among political elites, their career and financial rewards – graft in exchange for deals – are linked to economic prosperity. Hence, rather than “grab” from businesses through extortion, local leaders are typically eager to extend “helping” hands to favored investors by offering special deals, cheap land, regulatory exemptions, and other perks. State–business relations in China are not “extractive,” as Acemoglu and Robinson assert, but rather transactional.

What about the millions of Chinese street-level bureaucrats who are poorly paid and lack the power to benefit from deal-making? They also operate in a profit-sharing mode – through compensation practices. Even though formal public wages are standardized at “capitulation” (below subsistence) rates, the fringe benefits and pay of public employees are pegged to the financial performance of local governments and the agencies within them. In this way, their fringe compensation acts as an efficiency wage, incentivizing low-level bureaucrats to generate revenue and to avoid extortion and theft.

Capacity-building reforms have curtailed damaging forms of corruption. Yet no profit-sharing arrangement could work without state monitoring and punishment of those who engage in growth-damaging forms of corruption. Aiming to create a modern bureaucracy suited to a globalized market economy, the central government has advanced a host of capacity-building reforms since 1998. Local leaders were on board with these reforms as they constrained theft and predatory practices among their subordinates. The consequent pattern since 2000 is that, while grand bribery exploded, embezzlement, misuse of public funds, petty bribery, and extortive practices visibly declined. Simply put, to channel corruption away from its most destructive forms, incentives and penalties must go hand in hand; neither is sufficient on its own.

Regional competition checks predatory corruption, spurs on developmental efforts, and ratchets up deals: Although there is no electoral contestation, intense regional competition takes place within China’s politically centralized autocracy. To stand out from competitors, apart from curbing “grabbing hands,” the most able leaders such as Bo Xilai and Ji Jianye go much further by positioning and branding their locales, experimenting with policies, and fostering niches, strategies that enhance the overall commercial appeal of their locales. Simultaneously, they also offer privileged access for selected capitalists, whose bribes sponsor their personal consumption and wealth accumulation. To win political patrons and corporate clients, leaders must demonstrate competence and career potential. In short, in China, both development and corruption are competitive.’

And a powerful final summary of her ‘two core insights’:

‘First, while corruption is never good, not all forms of corruption are equally bad for the economy, nor do they cause the same kind of harm. Second, the rise of capitalism is accompanied not by the eradication of corruption, but rather by the evolution of the quality of corruption from thuggery and theft to influence peddling.’

For readers more familiar with US history, she has a powerful comparison with its ‘Gilded Age’ – a late 19thC cocktail of rampant corruption + high speed growth, leading to superpower status (sound familiar?)

Brilliant, and in a couple of weeks, I’ll have a podcast with Yuen Yuen, which takes the book as the starting point, so make sure you read this before listening in!

July 9, 2020
Duncan Green