What 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 Kingdoms rise to economic primacy.
One doesnt 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
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 Internationals Corruptions
Perceptions index, below Burkina Faso.
Minxin Pei of the Carnegie Endowment provides an analysis of
the problem in his 2006 book, Chinas 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
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.