Causes of Corruption in Transitional Economies : Russia and China Compared

ABSTRACT: Although China and Russia have undertaken separate approaches to the transition process, they have both become plagued by systemic corruption. China's corruption has arisen out of new opportunities that were not present under the old classless communism. These opportunities were created by Chinas gradualist approach to transition. Russia, on the other hand, witnessed a direct transfer of old corrupt Soviet practices in the absence of any reliable legal infrastructure during the transition. This has been the result of their shock therapy approach that was undertaken in 1992. Overall, both countries are now systemically corrupt as a result of their move to marketization from a centrally planned economy.

Introduction

Corruption is a complex problem that is deeply rooted within social, political, and economic life. The reason corruption is such a difficult problem is because there are not many satisfactory solutions provided, instead, there are only temporary remedies which lead to a structural change in the form of corruption practiced. Corruption is broadly defined as the use of public authority for private enrichment. However, many other definitions exist which stretch this definition to include multinational corporations and trustees. Historically speaking, no society is free from corruption. Russia and China are no different, and today they rank among some of the most corrupt countries in the world. Since beginning their transition from a centrally planned to a market-based economy, both China and Russia have experienced a perceived increase in their countries corruption level. This leads to my grounds for comparison which is; despite rampant corruption, China has excelled with rapid growth, while Russia’s economy has not. The source of each countries corruption remains a separate phenomenon reflecting their different approaches to the transition process. However, both countries have been plagued by systemic corruption during the marketization process.

The Causes of Corruption in Transition

There are many causes of corruption in transition that are vastly documented within the literature. They are, however, divided on which variables are important such as legal institutions, history, centralization or decentralization, income gaps, the form of governments, and many others, all which have a piece of the corruption puzzle. This is what makes corruption such a complex problem. Focusing on one variable leads to downplaying others that are equally as important, while many of the variables are interdependent upon each other. This leads to a gap in the literature and a void that's hard to fill. We can point to many immediate causes of corruption in transition, however, why were these the immediate causes? The reason for the problem is then rooted further within another issue.

For example, the Russian ‘shock therapy’ approach that was used before the establishment of a stable legal-institutional framework is often cited as the source of immediate transitional corruption in Russia. However, why was it not thought of to have an adequate legal infrastructure to support the imposition of a neo-liberal policy upon a traditionally authoritarian regime? The answer is rooted in the history of Russian authoritarianism which operated without such a legal framework, where the rule of law was non-existent, and property rights were never reconciled between the people and the state. Thus, to reiterate my point, corruption is a complex problem because many immediate sources of corruption have their deeper sources, making it hard to delineate definitive causes of the actual issue of corruption.

The Chinese Experience with Corruption in Transition

In China, corruption during the transition was caused by the very act of marketization and followed an evolutionary path reflecting the gradualist approach undertaken by the Chinese central authority. In 1978, a decade before Russian transition, China began reforming their system taking a ‘gradualist’ approach to market reform. Before transition the scale and scope of corruption in China was rather limited. High ranking officials would use their power to obtain better housing and brand name cigarettes or to send their children to better schools or jobs. (Xiaogang et al. 2010) This limitation of corruption was due to the over-centralization of political and economic power present within the system which allowed the government to keep a check on corruption. Since the beginning of China’s economic reform corruption has become even more prevalent, and is suspected to exist now at every level of government. China’s government has even touched on the seriousness of the problem, admitting that corruption, ‘’is now worse than during any other period since New China was founded in 1949. It has spread into the Party, into Government administration and into every part of society, including politics, economy, ideology, and culture.’’ (Xiaogang et al. 2010) The immediate source of China’s transitional corruption is located within the gradualist approach, mixed with the centralization of political authority which created the duel-track price system. Thus, in China marketization is the force which is an original source of transitional corruption.

At the core of China’s first marketization reforms was the creation of the dual track price system. This is the system created in 1978 by the transition away from prices prescribed by the planned economy towards prices increasingly determined by competitive markets. (Wedeman 2015) Essentially there are two prices; a lower regulated state-controlled price and a higher market price. The differential between the state price and market price creates opportunities for resource rents on investments, land, and the price at which government assets are sold. Furthermore, this incentive to extract rent is entrenched even more through the fact that China was just beginning the transfer from ‘classless communism’ where everyone was relatively equal towards a more capitalist order. This means that there was an incentive for officials to seek rent to supplement their traditionally small (but equal) pay, and to begin amassing their wealth that was not possible to accumulate under classless communism. Businesses and individuals that wanted to maximize their profits were often motivated to bribe public officials to obtain products at the lowest possible costs. (Xiaogang et al. 2010) Since official where the ones who often set the prices means that corruption was limited to the ranking officials. This leads to another source of corruption within China during the transition; privilege and personalized connections.

A prior history of personalized connections and increasing returns to the extent of the use of reciprocal non-anonymous exchange was characteristic of Chinese corruption in the initial transition period. Yao (2002) identifies two sources of corruption as being implicit and explicit corruption. Implicit corruption was created by granting privileges to certain groups, and as a result, the long-term existence of the same privileged group has led to widespread collusion among its members. (Yao 2002) As a result, by utilizing their monopoly power these privileged members are able to seize almost all the wealth created by the ordinary Chinese people. (Yao 2002) This is done through what Yao refers to as explicit corruption, which is essentially the dual-track pricing system. This corruption stemmed from China’s centralization of political and economic power, which grants protective privileges through personalized connections and was enforced through the duel track pricing system which continued to operate until the 1990s. In 1980 however, the structure of the dual track system became open to more commodities, leading to the next wave in Chinese corruption.

In 1980 China began to experience their second form of corruption. Again, the source of this corruption is related to centralization of government political and economic power due to the dual-track pricing system. Although the target of corruption was still the exploitation of price differentials, corruption-related products were changed from consumer goods to strictly state controlled commodities such as coal, steel, timber and cement. (Xiaogang et al. 2010) These differentials were the primary source of corruption with rent-seeking being the prevalent form of officials becoming rich. The total amount of rent (or price differentials in the dual-track pricing system) was about 356.9 billion Yuan or 30% of the GDP in 1988. (Xiaogang et al. 2010) During this time also, personalized connections were still rampant. These relationships were similar to the Russian nomenclature, however, this time it was the rise of ‘The Prince party”, or ‘guan dao’. They are offspring of high-ranking officials that frequently took advantage of their parents’ networks to become rich and started to enjoy the benefits associated with parental power. (Xiaogang et al. 2010) However, the role of such associations diminished in 1990 as the Chinese government undertook its fiscal decentralization.

In 1990s China took the next step in their evolutionary process. Initial reforms eliminated price differentials on most goods, while the central government gradually let go of its control of consumer and industrial products. The government began to release its grasp further through the process of fiscal decentralization. The Chinese economy gradually moved from a highly centralized financial regime to a relatively decentralized financial system that gave local governments and state-owned firms more discretionary power in fiscal policy. By doing this gave powers to local authorities that created opportunities for rent-seeking action such as taxation, while also limiting the government’s once central control over local abuses. This altered the form of corruption by removing barriers that were previously in the way of local corruption and placing opportunity into traditionally deprived authority’s hands.

China began marketization in 1978, and the immediate cause of corruption was marketization itself. This is mainly because mechanisms that were present in the tightly controlled centrally planned economy were lifted by the creation of the dual pricing system. This created an incentive for individuals coming out of classless communism to enrich themselves personally, which led to resource rents being generated through the dual pricing system. However, Chinese corruption was an evolutionary process, reflected in their gradualist approach to market reform. Initially, the dual pricing system was allowed, however, as the government undertook fiscal decentralization the nature of corruption changed. This is because differentials between the state and market price evened out. There was also more opportunity created for local officials in the decentralization process, while also fewer ways for the government to keep a check on them. Overall in China, corruption during the transition was caused by the very act of marketization and followed an evolutionary path reflecting the gradualist approach undertaken by the Chinese central authority.

The Russian Experience with Corruption in Transition

Russia’s leading cause of corruption during the initial transition was the imposition of a neo-liberal policy on a traditionally authoritarian state that lacked the legal infrastructure and norms that were required to avoid the continuity of many systemically corrupt Soviet practices. To understand the causes of Russia’s transitional corruption, there must be some account taken into regarding cultural continuities relevant to the practice of corruption. Within Russia’s corruption during the transition, history plays a major factor in explaining the causes. Twenty years after the collapse of the USSR, regions with a higher share of Communist Party members in the 1970’s have substantially higher corruption. (Libman 2013) Party members during the transition used privatization to benefit themselves in the absence of any legal framework to stop them. This is why many scholars argue that ‘corruption’ represents the extension of the informal culture and practices of the Soviet system to the opportunities presented by emerging Russian capitalism. (Kneen 2000)

Corruption has always been a major part of the social and political order in Russia. If one were to say to a Russian peasant in the year 1900 that to pay bribes to avoid taxes and to cheat on the state was a corrupt practice, he would not understand what was meant. (Dang 2010) In essence, the social norms that are expected within a functioning market economy were not, and are not present in the Russian transitional process. Corruption then has always been engrained into the Russian way of life, and much of the corruption that followed reforms can be seen as an extension of informal corrupt Soviet practices, making state capture in the process not surprising. Because of these practices it evident that historically rooted customary behavior of "stealing the state" has become the dominant form of expected business behavior in oligarchic transition. (Klemina 2010)

Before Russia’s transition Gorbachev attempted to initiate reforms, however, corrupt contracts were only further fortified as entrepreneurially minded party and government officials as well as commercialized enterprise managers started to take control illegally or semi-legally, of public property and to appropriate state`s revenue for personal enrichment. (Klimina 2010) Then in 1992, Russia began its transition from a centrally planned economy, towards a market economy. To do this, the Russian leaders undertook a ‘shock therapy’ approach to reform under advice from Harvard academics. From the start of transition in Russia, there were immediate causes of transitional corruption such as the rapid move towards the market in advance of the establishment of legal-infrastructure. (Kneen 2000) This failure to reform their economic before their political was a mistake China failed to make. A comprehensive World Bank study of corruption in the post-communist region notes that “corruption has played a vital part” in privatization. (Karklins 2002) This corrupt privatization was aided by a weak and practically non-existent legal infrastructure.

The absence of legal infrastructure made it impossible to generate transparent and secure property rights. There were hundreds of cases of organized crime groups seizing control of enterprises by force, and dozens of cases of state officials seizing firms through manipulation of tax arrears and other instruments. (Rutland November 2008) The lack of such a legal structure left an absence without a proper rule of law, with public authorities failing to set the proper social norms and the creation of large-scale mafia protection in the absence of state legitimacy and security. This rampant lawlessness is reflected in the fact that in 1997, between 70% and 80% of private enterprises and commercial banks were forced to pay protection fees to criminal organizations, while overall, organized criminals owned or controlled about 40% of Russian Private businesses, 60% of state enterprises, and 50% to 80% of banks. (Klimina 2010) The absence of adequate legal infrastructure created many opportunities for corrupt practices and became a direct source of transitional corruption in Russia.

The lack of legal framework, along with continuing social norms was the cause of much corruption during the transition. Tax laws are generally declared by decree in Russia, however, with a weak legal system, inspectors turned to predatory bribery to abuse their official power. Eighty-seven percent of Russian businessmen surveyed in 1997–98 reported extortionist bureaucratic pressures, specifically demands for bribes when they sought to obtain licenses and permits. (Karklins 2002) More so, a study of shopkeepers in Russia found that, on average, shopkeepers in Moscow were inspected by 3.9 different agencies, resulting in nineteen visits per year. (Karklins 2002) This is substantial, as shopkeepers in Poland were only visited by 2.4 agencies, four times in a year. The legal framework was only confused further throughout the transition. I read an article about lawyers entering into public policy for short periods of time in order to pass confusing and obscure laws. Once the laws were passed they would leave public policy and set up a private firm, and be the ones to disambiguate their new laws for the populace. All of this just breeds more corrupting making it a systemic feature of society.

Overall, Russia’s leading cause of corruption during the initial transition was the imposition of a neo-liberal policy on a traditionally authoritarian state that lacked the legal infrastructure and norms that were required to avoid the continuity of many systemically corrupt Soviet practices. Corrupt practices that were present under the old Soviet system were just directly transferred over to Russia during the transition. This was due to the lack of a legal framework to enforce such things as private property and the rule of law, while many authority figures failed to establish these norms for society as a whole. Russia’s corruption is reflected in their choice of a shock therapy approach in advance of an established legal infrastructure; many people took advantage of the underdeveloped legal markets, and state capture has become the normal form of business behavior. Corruption has become a systemic feature of Russian transition.

Conclusion: Russia and China Experiences Compared

Regional and social inequalities sharply increased in both countries as a result of the reforms. In Russia, the Gini coefficient rose from 0.29 in 1992 to 0.40 in 1997, where it stayed through 2008, while in China it went from 0.28 to around 0.45 1978-2000. (Rutland November 2008) Both China and Russia have become plagued by systemic corruption during the transitional period. However, their differences lie in their separate approach to the transitional process, with China undertaking a gradualist approach and Russia taking a shock therapy approach. In Russia’s case, the failure to establish adequate legal infrastructure before the start of the transitional process created the conditions for the direct transfer of informal corrupt Soviet practices. The inability to reconcile property rights and the rule of law before initiating reforms led to a ‘hijacking’ of the transition by oligarchs and the fortification of old Soviet practices during privatization. In China, the gradualist approach did not result in a transfer of old corrupt practices. Instead, barriers were lifted in areas that were previously off limits. This created the opportunity for corruption where there was not any opportunity before. Therefore, In China, corruption during the transition was caused by the very act of marketization and followed an evolutionary path reflecting the gradualist approach undertake by China. Initial reforms that centered on retaining centralized power for the government created a dual price system which created the opportunity for underpaid official to create resource rents. However, as the government began to decentralize their economic and political power in 1992, the character of corruption changed. Regional and social inequalities sharply increased in both countries as a result of the reforms.

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