How has Corruption driven China’s Rise? Yuen Yuen Ang discusses her new book

July 22, 2020

     By Duncan Green     

I sat down (via Zoom) this week with one of the most interesting observers of China, Yuen Yuen Ang. Her ground-breaking new book, China’s Gilded Age (see my review here), discusses the links between corruption and China’s stellar rise – and the real history of corruption and capitalism.

DG: China disproves everything we hear from Western political scientists. People like Acemoglu and Robinson say that China is a blip; it is going to collapse because of its extractive institutions; it doesn’t follow the American Dream. But China just keeps growing.

YYA: In my first book, I was grappling with how economies and institutions mutually evolve, and corruption is obviously a big part of the story. The conventional wisdom is that first we eradicate corruption and get good governance, and then we get economic growth. The point I make in this book is that’s not true – that’s a fairy tale! That phrase comes from Ha-Joon Chang, by the way. 

I’m glad you started with Acemoglu and Robinson – I would say that China is a blip as much as America in the 19th Century or the UK in the 18th Century are blips. In fact these three major superpowers are very similar – what really happened is that corruption went along with capitalism, and was manageable because corruption evolved into sophisticated transactional forms. That is the real history of capitalism.

DG: When I was reading your book, it reminded me a lot of Ha-Joon’s argument on trade policy. He showed historically that instead of saying ‘you need to liberalize trade in order to develop’, actually countries developed and then they liberalized trade – the World Bank had it exactly the wrong way around. Are you arguing something similar?

YYA: In hindsight, I really regret not citing Ha-Joon on this point – the parallel didn’t occur to me, but you are right. If you look at the history of the West, corruption was absolutely not eradicated before there was growth. When America was a developing country it was massively corrupt and had rapid economic growth and many parallels with modern China. So China today is a live demonstration of how history really happens.

DG: Could you talk us through your four domains of corruption?

YYA: The dimensions are whether corruption involves elites or non-elites; the second is whether it involves theft – one way extortion – or if it involves exchanges like lobbying or influence peddling. That gives you four categories – petty theft, grand theft, speed money or access money (fuller explanation here). To make it easy to remember I use the analogy with drugs: all corruption is bad – they are all drugs – but petty theft and grand theft are like toxic drugs [or drinking bleach, a term suggested by Jordan Schneider]; speed money is like painkillers; access money is like anabolic steroids – they help you grow rapidly but come with serious side effects that accumulate over time.

Access money functions as an incentive system for politicians and capitalists to work together, especially when massive infrastructure, involving huge sunk costs, is required for an emerging economy to take off. Access money overpays capitalists to do this, through cheap loans, subsidies, state backing, and in return you get feverish growth that lifts 700 million people out of poverty. 

DG: Do you think the government has a deliberate policy to encourage Access Money corruption and discourage the other kind? Is that something an official would recognize?

access money is like anabolic steroids – they help you grow rapidly but come with serious side effects

YYA: I don’t think there was a grand blueprint to begin with, but it was very clear to the reformers, particularly Deng Xiaoping – the architect of market reforms – that they wanted to do two things. To keep the Party united, and convince the Communist officials to embrace capitalism. So he set up a system where all of them could gain personally from a transition to a market economy, through an unstated reward system for both senior officials and junior bureaucrats. Everyone in the system benefits. The top leaders have fiefdoms – in their jurisdiction, when the city becomes richer, they extract rents. But the surprising part is that even rank and file bureaucrats have their compensation systematically tied to economic performance. They have aligned incentives in a systematic way.

DG: Whenever you say ‘not all corruption hurts growth’ you get branded as someone who is pro-corruption. In your view, is corruption ever a good thing?

YYA: The book argues that we need to go beyond a good/bad binary. Some kinds of corruption are undoubtedly bad – like drinking bleach. But Access Money is both good and bad. The right question we should ask is not whether corruption is good, but rather, a normative and historical question: “Is capitalism good?” In fact, capitalism has never been possible without corruption! It’s just that in advanced capitalist economies that corruption became legalized, sophisticated, to the point of becoming invisible to the public. But it has never disappeared.

DG: What about the implications for everywhere else – is China sui generis or can other countries can learn from it?

YYA: I would highlight three lessons.

  1. The standard normative and policy approach is to insist on eradicating corruption — which did not even happen in Western countries when they were developing. For researchers, the right question we should ask is how did some countries avoid the most growth-damaging forms of corruption and channel it towards Access Money corruption? How did some countries move from toxic drugs to steroids?  What to do about the damage from steroids?

they know that the political system is at risk as well – factions have become so enriched that they are not listening to Beijing

2. We have to ask ourselves is capitalist growth really the end? Should we be rethinking capitalism? Recently, many people have been doing that, because of inequality and rising discontent; mature democracies seem to be crumbling. In that conversation we talk about everything except corruption – we think it only affects backward nations but we need to bring the word in.

3. We need to recognize some fundamental differences between democracies and autocracies in the way they deal with corruption. If you look at America’s Progressive Era [the period following the Gilded Age], the main way to fight corruption was bottom up – transparency, free media, independent prosecutors. In China, Xi since 2012 has employed top down coercive inspections and arrests – 1.5 million officials disciplined under his charge. Different political systems have different menus of tools available.

DG: Where will this end – will China stay on steroids, pumping iron until it has a heart attack, or will it get off the drugs and emerge as a ‘modern nation’?

YYA: It’s pretty clear that the leadership under Xi knows that they’re in trouble. They’re trying to make the transition [to a ‘modern nation’] without a terrible crisis. In America state-bank collusion to build the country’s infrastructure ended in the first Great Depression of the 1830s. The causes of that meltdown are very similar to what we read about China today – mounting government debts, land and real estate bubbles. [The big crash] has not happened in China yet – it happened in the West. But it is whitewashed out of the fairy tale of inclusive and non-extractive institutions!

Today, China’s leadership know they have a debt crisis; they know they have a real estate bubble and over-construction; they know that there is so much Access Money floating around; and they know that the political system is at risk as well – factions have become so enriched that they are not listening to Beijing. That is why Xi Jinping made anti-corruption the cornerstone of his reign- he knows that the system could collapse if these dangers were not tackled head-on.

July 22, 2020
Duncan Green