Privilege and corruption: The problems of China's socialist market economy - New Perspectives on Transition Economics: Asia

American Journal of Economics and Sociology, The, Jan, 2002 by Shuntian Yao

Implicit corruption continued to be the dominant form of corruption in China until Mao's death. We suggest two reasons for it. First, Mao had always maintained his superior position over all his comrades in the CCP central committee. While he admitted the existence of the privileged class, he wanted to control the privileges of its members within some dimensions. He never allowed them to collude with each other to make higher political or economic benefits than were allowed. He regarded any kind of collusion among the privileged group members as a potential threat against his control over them and over all important national affairs. Second, before the Reform, there did not exist any significant private sector or private business in China's economy; almost all the economic activities were under the control of the state. As a result, the privileged group members did not have the chance to fully utilize their power to exploit any substantial economic benefits.

After Mao's death, Deng became the top leader of the CCP, but he did not have a superior position over the other paramount CCP officials, and thus was not able to prevent the aristocratic households from consolidating their connections among each other and expanding their privilege. This led to a widespread explicit corruption in the early 1980s. The naive form of explicit corruption is "doing business through the back doors," which has two meanings. Between the high-ranked officials themselves, it refers to their bribing each other with the state-owned resources they control. The head of a state-owned TV production company, say, could present color TVs as gifts to the head of a human resource department in exchange for decent official positions for his family members. Between these high-ranked officials and the majority of the people, it refers to the fact that the latter must bribe the former in order to do business with them. Otherwise, any request could be denied by these officials even if the request is within their duty. Complaining is useless because all these officials have formed collusion, thus no one would take notice.

In this aspect my experience could serve as a good example. After I completed my Ph.D. degree in the United States I returned to Guangzhou in early 1989, upon request by the Chinese government, to serve in Guangzhou University. However, it took eight months for me to restore my residence permit in Guangzhou, and when it finally came through I had spent quite a substantial amount of money for bribes. We call extortion of bribes "explicit" corruption of the privileged class members, because obtaining personal benefits in such a way is not legally allowed by the political system, although this kind of behavior is tolerated by the CCP leaders in most cases.

As China's economy grows in the Reform, explicit corruption also evolves. Many of the privileged group members have learned how to utilize their monopoly power in the markets. They became price searchers, demanding higher and higher bribes for doing business with ordinary people. The bribes could be a very substantial amount of money and privately are referred to as "commissions," although this is not an adequate term. The "commission" incomes of these privileged group members are never recorded in any account, and could be thousands of times higher than their normal wages. (See Yao 1997.) Just as we will describe in a formal economic model, these privileged group members have learned the two-part tariff strategy of a monopolist. The commission fees they charge are very much the same as the entrance fee charged by the monopolist in order to exploit all the consumer surplus of his customers. It is in this sense that the New Leftists accuse that China's corruption is caused by the introduction of capitalism. Ye t there are fundamental differences between a monopolist and a Chinese privileged group member. A monopolist works for himself, uses his private-owned capital, and pays tax against his profit, whereas a Chinese privileged group member works for the state in name, uses state-owned resources, and pays no tax against the unrecorded "commission" income. Thus explicit corruption has its specifically Chinese characteristics.