Edward ChancellorWhat explains the rise and fall of nations? The late economist Mancur Olson argued that economies are progressively captured by special interest groups intent on taking an ever larger slice of the pie for themselves. Their selfish actions may actually cause the pie to shrink in size. A grand historical drama plays out as the leading nation becomes increasingly sclerotic and is overtaken by a more dynamic upstart.

Many people believe the United States suffers from this type of sclerosis and that China is better placed to respond to the challenges posed by the global economic crisis. This view, however, ignores the deep-rooted corruption in the Chinese body politic, a problem so great that it poses a serious threat to the Middle Kingdom’s rise to economic primacy.

One doesn’t have to look far to find gross examples of rent-seeking in the U.S. Lobbyists twist Washington politicians around their fingers. Investment banks, unashamed by their role in precipitating the financial crisis, have skillfully evaded any serious regulation and are back to their old ways. Public sector unions fiercely protect their generous entitlements at the risk of bankrupting state and municipal finances. Other “distributional coalitions,” as Olson calls them, are seeking to mop up stimulus dollars and keep out foreign competitors.

China, by contrast, is seen as an example of latter-day enlightened despotism. Apparently unfettered by special interest groups, Beijing has acted boldly to maintain its prodigious rate of economic growth. At a time when the financial system in the West remains under threat from “financial weapons of mass destruction,” Chinese regulators have recently moved to restrict the use of derivatives for speculative purposes. If only the decadent U.S. could respond with such decisiveness.

The China dreamers, however, are turning a blind eye to the corruption that plagues the country. China recently slipped to 79th place in Transparency International’s Corruptions Perceptions index, below Burkina Faso.

Minxin Pei of the Carnegie Endowment provides an analysis of the problem in his 2006 book, China’s Trapped Transition: The Limits of Developmental Autocracy. The sale of public offices, or maiguan maigjuan, is commonplace, he says. The legal system is not independent from the executive branch of government. At the local level the judiciary is often ill-trained and corrupt, which means that property rights are not secure.

The commercial banking system remains under political control. As a result, capital is misallocated. In the early 1990s banks funneled cheap loans to state-owned enterprises. The resulting losses were vast — an estimated 40 percent of loans were later deemed nonperforming — and were socialized by a government bailout. Whatever profits these loans generated remained in private hands.