(This essay was published in South China Morning Post on 18 February 2015.)

 

China has waged a campaign against public corruption for the past two years and there is no sign of abatement. At first, there was speculation it was a cover for a power struggle and therefore would be short-lived. Increasingly, it appears to be a means of forging a new social contract for the post-Deng era.

 

The social contract forged by Deng Xiaoping traded market-driven economic growth for political stability. Some individuals and families amassed huge fortunes in the process. Many were private entrepreneurs whose gains were made through fair market competition, but others were public officials who captured economic benefits through the exercise of political influence. The rise of this public corruption has incensed the public.

 

Some commentators allege that corruption might be inherent to Chinese culture because, for over two thousand years, the traditional Chinese economy was quite corrupt despite failing to grow.

 

But the public corruption that existed in traditional China is, I believe, fundamentally different in nature from that which has appeared in a modernizing China.

 

Traditional China had an agrarian economy. Its defining characteristic was a large collection of geographically-dispersed village communities founded upon kinship relations.

 

In 221 BC, at the end of the Warring States Period, China became a unified, centralized, bureaucratic imperial state that became the main glue holding together the diffusion of local agrarian economies. The latter were not economically integrated even up until Deng’s reforms.

 

The state ruled through an imperial bureaucracy based on merit that was expensive and difficult to operate. Government officials were chronically underpaid. Public corruption therefore became a normal practice for supplementing their incomes.

 

The state combated this corruption by training officials in public virtues, specifically the upholding of Confucian ethics. Unfortunately, the conflicting Confucian requirements of piety towards the family and loyalty to the state pitched the interests of the state against the family. The dark drive to embezzle and extort was ultimately tied to love and concern for the welfare of one’s family and kinsmen. Family interest still is at the center of most cases of public corruption in China today.

 

In a modern economy, funding a centralized bureaucracy becomes easier because the economic surplus is much larger. Public corruption, however, can actually worsen because there are far more opportunities for officials to sink their teeth into.

 

Three circumstances can cause public corruption to worsen. First, if a large share of the economy is under state ownership, then officials have greater opportunity to siphon off public resources into private pockets. Second, if a large share of economic activities is regulated by the state, officials have more opportunity to abuse their public authority for private gain.

 

And third, as old economic sectors decline, new sectors emerge and government policies seek to hinder or facilitate this process, public officials and politicians have opportunities to extract private economic benefits for themselves. Public corruption then hurts economic modernization by halting or delaying the adjustment process of “creative destruction”.

 

Deng’s reforms achieved the greatest economic miracle since the Industrial Revolution. But the mixture of economic markets and the grabbing hand of government officials in almost all walks of economic life created unprecedented opportunities for public corruption.

 

After 30 years, the winners of these reforms have begun to resist further reforms. Xi’s campaign against public corruption threatens to shake up this entrenched establishment.

 

Building up Xi’s personal authority may be a necessary development to enable him to push his campaign forward. While there is much speculation that this concentration of authority will lower the incentive to reform markets further, the leadership in China understands this danger.

 

Unless the government’s role in the economy is further reduced and the role of the market expanded, the campaign to root out public corruption will only produce a one-shot effect.

 

An efficient, competitive, modern market economy requires a level playing field for all. Conceptually, this complements the state’s need to be rid of public corruption in order to uphold the law. It may also be helped by the coming of a new generation that is no longer connected by local kinship ties due to urbanization and the unintended consequences of the “one-child” policy.

 

Xi’s campaign could pave the way for long-term economic modernization, and an enormous political legacy, if it leads to a leaner bureaucracy and a more limited and inclusive state – something that was favored even in traditional China.

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