Corruption Driven Reform: China's Economic Reforms in the Post-Mao Period

Is corruption simply an inexcusable evil of society? Even though the overall harm of corruption is not to be contested, this paper offers a challenge to the absoluteness of such a view. It raises the argument that when the situation calls for and when a particular set of conditions is met, corruption can, despite its problems, contribute to the dynamic political development of societies.

The case study for this research is China during its 1978 to late-1980s marketization reform. With this case study, the research contends that in effect the opportunities for corruption that stemmed out of the reform process had counter-balanced the political anti-reform resistance coming from the local governments. Corruption replaced lost privileges with new opportunities, regulated incentives, and created new forms of relationships that eventually allowed reforms to happen. Indeed, it was gains from corruption, rather than political motives or top-down power, that attached China’s local governments to reforms and provided the process with much-needed momentum.

Methodology

Starting off from a gap in the corruption literature, this study attempts to analyze the role of corruption in the paradox of China’s economic reforms, i.e. the paradox of supposed local resistance versus the actual local pro-reform, developmentalist mindset. It does so by examining three possible hypotheses: The main hypothesis argues for a role of corruption in mediating the interests of local governments toward supporting the reforms, while the other two either emphasize political motives (alternate hypothesis) or dismiss the existence of significant resistance to reform altogether (null hypothesis).

Notably, this research seeks not as much to affirm any of the hypotheses as to falsify them: It looks for evidence, both primary and secondary, that would discredit each hypothesis, and afterward selects the strongest hypothesis. At the final step, once this last hypothesis has been identified, its mechanisms would be explained in further details, and another scan through the evidence will be conducted so as to find out if the theoretical reasoning behind this hypothesis can be backed up empirically.

In terms of evidence, the research relies on not a single type of sources or an existing database. Rather, it attempts to put together different pieces of evidence that are used in other previous works. These include – but are not limited to – official government documents, province-level case studies, as well as secondary observations and accounts of Chinese institutional structure.

Corruption and Development in a Theoretical Context

The phenomenon of corruption has a long history. It existed long before the modern world, and can be dated back to the days of monarchial regimes in England, Prussia and Russia among others, or, even older, to the times of ancient civilizations. In fact, one can say that corruption exists as soon as the notion of power comes to being. These two walk side by side, for with power comes the abuse of power, and through corruption, one has the opportunity to gain even more power.

Compared to the past, though, the topic of corruption in our modern days has become more prominent than it has ever been. Corruption studies have across many fields of political science, and into different camps of literature. Among them, one particular literature that has garnered a lot of prominence looks into corruption with special emphasis on its impact on the economic and political development of societies. Here, a fierce debate takes place. On one hand is the dominant, mainstream perspective, which regards corruption as an absolute evil. Politically, they argue, corruption introduces instability and decreases government legitimacy and capacity.

Economically, “corruption adds costs to transactions, rewards inefficiency while penalizing efficiency, and diverts human as well as economic resources away from productive activity into rent-seeking” (Heidenheimer and Johnston, 2002, p. 305). This viewpoint also condemns corruption for other social ills such as the furthering of income inequality, or the discrediting of justice, fairness and due process.

The dominant view, however, is not without challenges. Advanced by several skeptics is the “grease the wheel” hypothesis, which suggests that corruption, in certain situations, can actually become useful. Corruption might, for example, help cut through bureaucratic red-tapes, speed up processes where government infrastructure is underdeveloped, and creates markets for goods and services that otherwise would never be available for purchases (Leff, 1964, Leys, 1989, Huntington, 1968). To this date, however, the weight of empirical evidence is leaning heavily against this hypothesis. Major studies of corruption’s effect on key economic performances demonstrate that in fact, corruption does not speed up, but even slow down and complicate bureaucratic processes and market mechanisms further: Méon and Sekkat (2005) study the relationship between corruption and a series of indicators on growth, investment and governance in 71 countries, only to conclude that corruption actually “sands the wheels” instead of greasing it.

Another meta-analysis on the relationship between corruption and growth also finds “rather limited support to the view that corruption greases the wheels of growth” (Campos & Dimova, 2010). About 32% of the analyzed studies point out significant negative impact on growth, compared to only 6% that support the “grease the wheel” hypothesis. The main reason why corruption has not actually compensated governance, in short, is that it creates incentives for bureaucrats to drag their feet even more, while raising extraneous barriers and red-tapes to extract bribes and kickbacks from their clients.

As empirical evidence successfully dispels the “grease the wheel” hypothesis, the literature debate is for the most part settled back to the consensus. Nevertheless, to the staunchest critics, this consensus can still hardly convince them of the absolute harm of corruption. One can argue, with good reasons, that the debate is insufficient in three very important ways. First off, both the “grease the wheels” and “sand the wheels” hypotheses come from a perspective that treats corruption as a day-to-day occurrence within a static and well-established politic-economic system.

That perspective, however, does not consider the influence of corruption in periods of dynamic change, such as during economic reforms, revolutions, or institutional restructuring. What directly follows is that while corruption has been condemned for its quantitative effects on many aspects of societies’ economic and political structures, little effort has been paid to examine its qualitative impact on these very structures at a more fundamental level. Secondly, the pros and cons of corruption have so far been judged mostly in economic terms, while its political effects are much less often incorporated into the debate. Although some authors have partly touched on the political side of the issue (Huntington, 2002), they still reflected the static, gradualist attitude in their interpretation of modernization as a slow and continual process.

This literature gap is more than just problems of the pickiest critics; rather, its implications can be quite significant for our understanding of corruption in many parts of the world, where economic growth, political stability and social order are not the only things that are of immediate demands. States and societies do not simply grow – they also evolve and transform through processes of reform and revolution. Thirdly, most analyses all too often tend to compare corrupt systems, at least implicitly, to ideal, corrupt-free ones, which have never existed: This overlooks the possibility that despite its effects, corruption can be the least harmful alternative on offer for a society to function. As a consequence, a corruption literature that neglects corruption’s role in these dynamic changes is sure to be at a disadvantage when it comes to explaining many development patterns of the modern world.

Background: Market Reform in China

For an illustration of how that literature gap can present significant implications, one needs not look further than the second-biggest economy in the world, China. The country, to begin with, is known for the high salience of corruption. Transparency International’s Corruption Perception Index, which measures perception of corruption, gives it a very humble ranking at the 75th position ("Corruption Perception Index," 2011). At the same time, China is known as well for its economic performance. Between 1979 and 2010, China’s economy grew by an average rate 8.75% (Wedeman, 2012). The coexistence of high corruption on one hand and high growth on the other present a conflicting picture that Wedeman (2012) termed a “double paradox,” and that many others have been trying to decipher.

To explain how corruption factored in China’s economic prowess, one needs to keep in mind that this economic “miracle” began not out of nowhere; rather, it came into being only after the country underwent a radical transformation of their economic structures and principles. This transformation occurred in 1978, in the aftermath of the devastating Great Leap Forward and Cultural Revolution that caused the death of around 30 million1 while leaving China’s economy in disarray. Following Mao Zedong’s death, a struggle for power took place between the conservative Hua Guofeng, who was also Mao’s designated successor, and the pro-reform Deng Xiaoping.

This struggle eventually ended with Deng’s victory, who then led China to a sharp turn away from its root as an agrarian, centrally commanded economy: It began to aggressively embrace the private market, encourage capitalist economic principles, and opened itself to foreign trade and investment. All the changes only occurred on the economic dimension, however. Politically, the Chinese Communist Party (CCP) retained its grip on power, and did little to back down on the political control it exerted upon the society.

Even when there was no attempt to reform China politically, the market reforms nevertheless had effects on the political power structure, especially at the localities. More often than not, reforms took away the traditional status and privileges previously monopolized by local Communist leaders. In terms of status, the leaders’ position as the sole local elites came under heavy pressure from the rising entrepreneurial class. Deng Xiaoping’s quote, "It doesn't matter whether a cat is white or black, as long as it catches mice,” is thus more than a nod to the equality of status between two modes of production: It also means equality between the traditional leaders and the newly emergent class of challengers.

Not only were there losses in social status, but local leaders also had to give up some of their political power, too. For example, contracting out production to the private sector means the power of a leader to control his province’s economic actions e.g. allocating production quota, organizing labors, as well as the power to grant and withhold major benefits, also got diminished and transferred to private hands. Finally, one had to count as well the ideological predicament that Communist cadres, especially the conservative hardliners, had to face when capitalist economics were suddenly introduced to China, and even endorsed by the Party. All in all, the reforms in China, while trying to maintain the political status quo, nonetheless created disturbances within the lower provincial hierarchies of Communist leadership.Continued on Next Page »