How has Corruption driven China’s Rise? Yuen Yuen Ang discusses her new book

I sat down (via Zoom) this week with one of the most interesting observers of China, Yuen Yuen Ang. Her ground-breaking new book, China’s Gilded Age (see my review here), discusses the links between corruption and China’s stellar rise – and the real history of corruption and capitalism.

DG: China disproves everything we hear from Western political scientists. People like Acemoglu and Robinson say that China is a blip; it is going to collapse because of its extractive institutions; it doesn’t follow the American Dream. But China just keeps growing.

YYA: In my first book, I was grappling with how economies and institutions mutually evolve, and corruption is obviously a big part of the story. The conventional wisdom is that first we eradicate corruption and get good governance, and then we get economic growth. The point I make in this book is that’s not true – that’s a fairy tale! That phrase comes from Ha-Joon Chang, by the way. 

I’m glad you started with Acemoglu and Robinson – I would say that China is a blip as much as America in the 19th Century or the UK in the 18th Century are blips. In fact these three major superpowers are very similar – what really happened is that corruption went along with capitalism, and was manageable because corruption evolved into sophisticated transactional forms. That is the real history of capitalism.

DG: When I was reading your book, it reminded me a lot of Ha-Joon’s argument on trade policy. He showed historically that instead of saying ‘you need to liberalize trade in order to develop’, actually countries developed and then they liberalized trade – the World Bank had it exactly the wrong way around. Are you arguing something similar?

YYA: In hindsight, I really regret not citing Ha-Joon on this point – the parallel didn’t occur to me, but you are right. If you look at the history of the West, corruption was absolutely not eradicated before there was growth. When America was a developing country it was massively corrupt and had rapid economic growth and many parallels with modern China. So China today is a live demonstration of how history really happens.

DG: Could you talk us through your four domains of corruption?

YYA: The dimensions are whether corruption involves elites or non-elites; the second is whether it involves theft – one way extortion – or if it involves exchanges like lobbying or influence peddling. That gives you four categories – petty theft, grand theft, speed money or access money (fuller explanation here). To make it easy to remember I use the analogy with drugs: all corruption is bad – they are all drugs – but petty theft and grand theft are like toxic drugs [or drinking bleach, a term suggested by Jordan Schneider]; speed money is like painkillers; access money is like anabolic steroids – they help you grow rapidly but come with serious side effects that accumulate over time.

Access money functions as an incentive system for politicians and capitalists to work together, especially when massive infrastructure, involving huge sunk costs, is required for an emerging economy to take off. Access money overpays capitalists to do this, through cheap loans, subsidies, state backing, and in return you get feverish growth that lifts 700 million people out of poverty. 

DG: Do you think the government has a deliberate policy to encourage Access Money corruption and discourage the other kind? Is that something an official would recognize?

access money is like anabolic steroids – they help you grow rapidly but come with serious side effects

YYA: I don’t think there was a grand blueprint to begin with, but it was very clear to the reformers, particularly Deng Xiaoping – the architect of market reforms – that they wanted to do two things. To keep the Party united, and convince the Communist officials to embrace capitalism. So he set up a system where all of them could gain personally from a transition to a market economy, through an unstated reward system for both senior officials and junior bureaucrats. Everyone in the system benefits. The top leaders have fiefdoms – in their jurisdiction, when the city becomes richer, they extract rents. But the surprising part is that even rank and file bureaucrats have their compensation systematically tied to economic performance. They have aligned incentives in a systematic way.

DG: Whenever you say ‘not all corruption hurts growth’ you get branded as someone who is pro-corruption. In your view, is corruption ever a good thing?

YYA: The book argues that we need to go beyond a good/bad binary. Some kinds of corruption are undoubtedly bad – like drinking bleach. But Access Money is both good and bad. The right question we should ask is not whether corruption is good, but rather, a normative and historical question: “Is capitalism good?” In fact, capitalism has never been possible without corruption! It’s just that in advanced capitalist economies that corruption became legalized, sophisticated, to the point of becoming invisible to the public. But it has never disappeared.

DG: What about the implications for everywhere else – is China sui generis or can other countries can learn from it?

YYA: I would highlight three lessons.

  1. The standard normative and policy approach is to insist on eradicating corruption — which did not even happen in Western countries when they were developing. For researchers, the right question we should ask is how did some countries avoid the most growth-damaging forms of corruption and channel it towards Access Money corruption? How did some countries move from toxic drugs to steroids?  What to do about the damage from steroids?

they know that the political system is at risk as well – factions have become so enriched that they are not listening to Beijing

2. We have to ask ourselves is capitalist growth really the end? Should we be rethinking capitalism? Recently, many people have been doing that, because of inequality and rising discontent; mature democracies seem to be crumbling. In that conversation we talk about everything except corruption – we think it only affects backward nations but we need to bring the word in.

3. We need to recognize some fundamental differences between democracies and autocracies in the way they deal with corruption. If you look at America’s Progressive Era [the period following the Gilded Age], the main way to fight corruption was bottom up – transparency, free media, independent prosecutors. In China, Xi since 2012 has employed top down coercive inspections and arrests – 1.5 million officials disciplined under his charge. Different political systems have different menus of tools available.

DG: Where will this end – will China stay on steroids, pumping iron until it has a heart attack, or will it get off the drugs and emerge as a ‘modern nation’?

YYA: It’s pretty clear that the leadership under Xi knows that they’re in trouble. They’re trying to make the transition [to a ‘modern nation’] without a terrible crisis. In America state-bank collusion to build the country’s infrastructure ended in the first Great Depression of the 1830s. The causes of that meltdown are very similar to what we read about China today – mounting government debts, land and real estate bubbles. [The big crash] has not happened in China yet – it happened in the West. But it is whitewashed out of the fairy tale of inclusive and non-extractive institutions!

Today, China’s leadership know they have a debt crisis; they know they have a real estate bubble and over-construction; they know that there is so much Access Money floating around; and they know that the political system is at risk as well – factions have become so enriched that they are not listening to Beijing. That is why Xi Jinping made anti-corruption the cornerstone of his reign- he knows that the system could collapse if these dangers were not tackled head-on.

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Comments

10 Responses to “How has Corruption driven China’s Rise? Yuen Yuen Ang discusses her new book”
  1. Narayan Manandhar

    If corruption is in indispensable part of capitalism, does this imply that communism and its variants are free of corruption? Shall we assume North Korea as a corruption-free country? If corruption is a by-product of capitalism, why anti-corruption ideas (say, FCPA) are coming from the West?
    Agreed that corruption acts as a steroid, agreed that steroid is bad for health; agreed that corruption could have beneficial effects at second and third rounds, if not in the first round, agreed that China’s anti-corruption drive is having a chilling effect on its economic growth rate. But the fundamental issue here is: corruption is unethical, it is immoral, it is illegal – the single reason why so many countries have ratified UNCAC within a short span of time. We have come a long way from regarding corruption as beneficial, acceptable and legal to morally wrong, unacceptable and punishable crime. If we continue to believe that “bribe greases the squeaky wheels of bureaucracy” we are back to square one. We are implicitly justifying corruption. Arguing that US had a corruption in 19th Century and it is normal for China to have corruption now is like arguing that I have a right to steal from you now because you have stolen from me earlier. The world will be going no where. Also we need to watch that China’s top-down, political purge like anti-corruption drive cannot be separated from political vendetta. As the author has also agreed that without anti-corruption drive, the regime in China going to be unstable, fragile.

    • Yuen Yuen Ang

      Unfortunately, you have missed the point and distorted my argument. This is not a defense of corruption.

      Duncan highlighted this quote: “access money is like anabolic steroids – they help you grow rapidly but come with serious side effects.” I have taken the extra length of drawing an info-graphic, showing that all corruption is harmful and harm in different ways. Even if you do not listen or read, surely you can see a picture?

      But I understand why you react in this way. Because the soothing narrative goes as follows: “Corruption is awful. Look at all these corrupt people, they are so awful. We can solve the problem by condemning corruption and condemning these bad people!” And if one happens to detest China, then an even more soothing narrative goes: “Let me tell you how bad corruption is in China. Here are 200 scandals. Eww!!!”

      Such narratives satisfy emotions and affirm biases. As Mark Pyman noted, “they enjoy showing how bad [corruption] is,” but they do not help us understand or fight the problem better. (https://www.cdacollaborative.org/blog/unhelpful-nature-anti-corruption-research-seen-people-trying-develop-solutions/)

      • Ydong

        True that corruption is a matter of fact related to human behavior and mindset. But when you said “The right question we should ask is not whether corruption is good, but rather, a normative and historical question: “Is capitalism good?”, your argument sounds more trying to avoid to answer the hard question about corruption itself (a matter of fact like corruption has many perspectives and that’s where we use our values, instincts and knowledge to facing it to make a better world, not just an economically better world). Corruption had been existing before capitalism was ever introduced. In imperial China, in Roma, corruption was there as they were in the course of capitalism development and as they are now. So how can you simply blame capitalism for corruption? I also doubt about the assertion that corruption is good to economy. Here you mean economy of whom? If that’s a corruption, there are obviously victims in it, so corruption is obviously bad to the economy of these victims.
        On the other hand, why do you think the Western institutions were telling fairy tales and are trying to eradicate corruptionis? This system is visibly trying to live with corruption by minimizing its impact in a case-by-case scope so as to isolate the damage of a corruption case from the other societal aspects such as justice and equalty. That’s actually the best a check-and-balance system can achieve, far from eradicating corruption.
        You are right about corruption being a matter of fact in human societies but I’m not convinced by the rest of yout analysis.

        • Yuen Yuen Ang

          I’m glad you’re not convinced. If you were convinced, it means I am supplying an argument that you like to hear. I don’t do ideology. I supply the research, historical facts and perspective, which may not be what you like to hear.

          This is not about “blaming” capitalism for corruption. This is to remind us to be be vigilant about the dangers of modern capitalism – one of which is legalized access money with supersized stakes, leading to high inequality and popular discontent – and to take steps to address these dangers, so that we can have a capitalist system that works for most people, not just the 0.01%. In times of crisis, countries have historically taken these steps.

          Many recent books calling to fix capitalism argue the same as I do, except they start with capitalism, rather than with corruption. For example, Henderson’s Reimagining Capitalism on a World of Fire (https://www.amazon.com/Reimagining-Capitalism-World-Rebecca-Henderson/dp/1541730151/ref=sr_1_1?dchild=1&keywords=capitalism+on+fire&qid=1595849041&sr=8-1). In it, she talks about corruption.

      • Narayan Manandhar

        It is not me who missed and distorted the facts. Read your reactions to my earlier comments. When I simply informed you that Mustaq Khan has done a similar study comparing corruption and development in East Asian and South Asian countries, you were making blunt reactions.

  2. Yuen Yuen Ang

    Duncan, thank you for having me on your podcast! You always ask the best questions. The parallel you drew with Ha-Joon Chang’s Kicking Away the Ladder is spot-on. I wished it occurred to me earlier, especially as I am a huge fan of his work.

    Ha-Joon challenges the heterodoxy in economics and development, by asking: How did rich countries really become rich? On the issue of corruption, there are serious history books – not the “fairy tale” variety – on how corruption and rapid growth went hand-in-hand in the rise of the West. (See White’s Railroaded and Brand’s American Colossus.) But these have been omitted from mainstream political economy and consequential development policies of the past decades – because they are real histories.

    After speaking with you, it occurred to me that this whitewashing of the real history of capitalism and corruption should be connected with recent debates about “rethinking capitalism” in Western democracies. The problems of capitalism today – extreme inequality, erosion of meaningful representation, popular discontent – has everything to do with “corruption,” except that in the first world, we no longer call it that. What is the role of legalized corruption in the crisis of capitalism seen today? How did we get to this point?

    When we look at China’s experience, we should not dismiss it as a “Chinese” thing – it should help us reflect on the path that rich capitalist societies took much earlier on.

    • Severin

      Very interesting stuff. Certainly agree that there are corruption parallels btwn 1800-1900s industrialization in Western countries and economic capitalism in “developing” countries. Also agree that corruption seems to exist whenever we see rapid economic activity in the modern capitalist system (although the impetus may vary, e.g. privatization (Russia), war (Afghanistan), oil booms /hyper investment (Equatorial Guinea). I question however whether we should tie corruption to historical capitalism, or some kind of linear idea of capitalist development. It is not necessarily the case that capitalist economies somehow shed corruption as they become more economically advanced. Corruption control serves other economic and/or political purpose which can exist (or not exist) independent of a country’s economic growth. That is to say neither the presence nor absence of corruption are defined by the presence (or absence) of capitalism so much as capitalism, particularly of the variety that causes rapid economic growth, is necessarily, it seems, characterized by corruption.

      • Yuen Yuen Ang

        We are in agreement on this point; it is what I argue: “It is not necessarily the case that capitalist economies somehow shed corruption as they become more economically advanced.” Specifically, the line I use in my book is: “Contrary to popular beliefs, the rise of capitalism was not accompanied by the eradication of corruption, but rather by the evolution of the quality of corruption from thuggery and theft toward sophisticated exchanges of power and profit.”

        The “linear idea of capitalist development” is in the conventional wisdom (establish good institutions first, then growth, or vice versa). My research challenges linear arguments.

  3. Thanks Professor Ang – a really interesting podcast on what looks like an even more interesting book. Reading the heated debates in the comments, I can’t help coming back to some fundamental issues around how we define ‘corruption’. I generally tend to turn off whenever academics debate definitions but… it seems that some of the commenters accept legal definitions of corruption, perhaps around UNCAC or definitions in national law, whereas you provocatively – and interestingly – suggest the idea of ‘legalized corruption’ in western countries. What would you include in such legalized corruption? Bankers’ high salaries? Official, legal lobbying by particular interest groups? The ‘old boys network’ or the ‘revolving door’ between business and Government? I think the problem with some of the internationally accepted definitions of corruption such as TI’s “the abuse of entrusted power for private gain” is that they turn on the idea of ‘abuse’. The ‘use’ of power for private gain is in principle OK according to this definition, as long as it is not ‘abuse’. Is the judgement of what constitutes ‘abuse’ a legal one? In other words if it isn’t criminal, it’s fine? Or is it a moral one, in which case a much wider range of behaviours can be seen as ‘corruption’? I wondered if you had any thoughts about this. Many apologies if it’s already defined in the book, as I haven’t yet had a chance to read it. Thanks again for the interesting discussion.

  4. Yuen Yuen Ang

    Hello Justin, thank you for your constructive question! In one chapter of my book (also a shorter blog here: https://oecd-development-matters.org/2020/06/25/unbundling-corruption-why-it-matters-and-how-to-do-it/), I introduce a new corruption index I piloted, call the Unbundled Corruption Index. It measures experts’ perceptions of the four types of corruption in my framework, including access money. Instead of asking them to rate broadly, “how corrupt is X country?” – which is the common practice – I present stylized vignettes to capture different sub-types of access money: for example, massive bribes; paying for politician’s family expenses; revolving door; lobbying for favorable regulations. This method allows us to flexibly include corrupt acts of greatest concern in the measurement, substituting for bundled ratings that turn out to be biased and penalizes developing countries. I find that when people are asked to rate a country’s corruption broadly, they rate low-income countries as more corrupt and high-income countries are less corrupt than they would when perceptions were unbundled.

    In short, I adopt a broad definition of access money, which can be illegal or legalized, directly financial (bribes) or not (revolving door). I welcome suggestions for other including other variants of “access money” in future measures.

    TI scores are constructed by collating results from existing third-party surveys, so even though TI expresses a definition, it’s not clear that all of its sources have the same definition and measure corruption according to it.

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