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.
Beijing has decentralized many powers since Deng
Xiaopings reforms commenced three decades ago. This has
been beneficial for economic growth. However, it has also
created the opportunity for local elites to line their
China is an example of decentralized predation,
according to Pei. In the southwestern city of Chongqing, the
recent trial of an owner of illegal casinos involved more than
9,000 suspects and 50 public officials, according to The New
York Times. One member of the local judiciary was discovered to
have buried $3 million in cash in his fish pond. Protesters
outside the court complained that they had been taken forcibly
from their homes, which were later demolished for
redevelopment. The bandits used to live in the
mountains, lamented one local interviewed by the Times.
Now they live in the Public Security Bureau.
A key measure in Chinas stimulus package has been the
explosion of bank lending, which expanded by 30 percent in the
first half of the year. This creates a great opportunity for
self-enrichment by the local elites. Money has flowed primarily
into infrastructure projects; but, as Pei observes, in
China you dont rob a bank, you rob infrastructure.
Profits are generated through land seizures for development,
the use of inferior building materials and the failure to build
according to specifications.
Local governments have set up development companies to
undertake infrastructure projects, funded with bank loans.
However, reports suggest that these loans may be passed back to
the local government. Such off-balance-sheet public financing
is common in China, Pei notes.
The credit explosion in China has fueled speculation in
commodities, stocks and real estate. A recent report by
Independent Strategy, an investment consulting firm
headquartered in London, describes state-owned enterprises
passing on loans to affiliated window companies,
which have been using the money to acquire properties in Hong
Kong. After a purchase, writes Independent Strategy, the window
company goes to a local HK bank and raises a mortgage.
Thats when the chips are cashed into foreign currency,
and god knows what happens to the proceeds next.
The last two economic superpowers Britain in the 19th
century and the U.S. in the 20th century rose to
prominence on the backs of strong institutions that protected
property rights and encouraged wealth creation. In neither
country was government corruption extensive enough to hold back
economic growth. Today the U.S. may face a challenge from
vested interests, but at least the Constitution and the courts
still protect property rights. A free press ensures that
corruption is exposed. If the politicians are too venal, they
can be kicked out.
None of this is true of China. Wu Jinglian, the
countrys most respected economist and the architect of
Deng Xiaopings reforms, recently warned that corrupt
bureaucrats were pushing the state to take a larger economic
role so they can cash in on their positions through payoffs and
bribes. Im not optimistic about the future,
Wu told the Times. The Maoists want to go back to central
planning, and the cronies want to get richer.
There is no doubt that the Chinese are a clever and
industrious people. They are also very numerous. However, those
who believe that the 21st century belongs to China should heed
the words of Adam Smith: Great nations are never
impoverished by private, though they sometimes are by public
prodigality and misconduct. The whole, or almost the whole
public revenue, is in most countries employed in maintaining
unproductive hands. . . . Those unproductive hands . . . may
consume so great a share of the whole revenue, and thereby
oblige so great a number to encroach upon their capitals, upon
the funds destined for the maintenance of productive labour,
that all the frugality and good conduct of individuals may not
be able to compensate the waste and degradation of produce
occasioned by this violent and forced encroachment.
Edward Chancellor is the author of Devil Take the
Hindmost and a senior member of GMOs asset allocation