Corruption by Wade Wu

CORRUPTION IS

Edited and designed by [Wade Wu]

Preface This book is a collage of the term ‘corruption’ within the contexts of contemporary Chinese politics and economics. It is designed for people to understand what does corruption look like in China through multiple viewpoints and perspectives. After experienced several engagements and various deconstructionist process of this term, I figured out that - to understand such universal yet complicated abstraction, none of the daily observations and academic researches should be ignored. Most of the people in the world can feel the existence of corruption, as well as loads of people out there desire to corrupt. Indeed, corruption exists among the subjective part of humanity, yet, not entirely. “The real is the rational and the rational is real.” Hegel wrote this quote and his philosophical thinking explained a lot of things. Take a deep look at the problematic and consider what is the motivation; academic scholars described the term ‘rent-seeking’, a behaviour that …

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Innovation or Rent-seeking? The Institutional Environment and Entrepreneurial Behavior during Chinaâ&#x20AC;&#x2122;s Economic Transformation

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Rwanda

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80 Peopleâ&#x20AC;&#x2122;s Republic of China

Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men. -

John Emerich Edward Dalberg Acton, first Baron Acton

boss 老板

gov

税收

taxes politician 政客

富

rich bank 银行

erty

homeless 无家可归 wealth 财富

chinese 中国人

communis

capitalism 资本主义 stalin 斯大林

断

cash 钞票 3

broke

政府

vernment

贪心

sex

性

钱

greed crime 犯罪

泼妇

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bitches

丑

word

mon-

贫

poor 坏

缺乏

ugly bad stupid

pov-

愚蠢

共产主义

shit 粪便

m 美元

dollars 荡妇

whore

fǔ 朽烂，变质：腐烂。腐朽。腐败。腐化。腐蚀。腐臭。陈腐。流水不腐。思想陈旧过时：腐旧。腐儒。迂腐。某些豆制食品：豆腐（“腐”读轻声）。腐乳。腐竹。古代指施以宫刑：腐刑。笔画数：14；部首：肉； Decay, deterioration: rotting. Decadent. Corruption. Corruption. Corrosion. Rancid. Trite. Water does not rot. Obsolete ideas: Decaying. Furu. Pedantic. Some soy foods: tofu ("rot" read softly). Fermented bean curd. Yuba. Ancient refers to impose castration: Fu Xing. Strokes: 14; Radical: meat;

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Lose, defeat, unsuccessful, and the “victory” relative: defeat. Retreat. Defeat (a. company rout;. B career defeat). Lost. Flaw. Defeat. Suffer. Overcome, so that failure: defeat the enemy. Destruction: destruction. Brought to light. Discharged, dissipated: relieve inflammation. Sepsis. Old, fading, rot: foul. Decline. Disappointed (xìng) (depression). Corruption. Leaves stray defeat. Into Kingpak Stroke: 8; Radical: Tony; 输，失利，不成功，与“胜”相对：败北。败退。败绩（ａ．连队溃败；ｂ．事业的失利）。败诉。败笔。败局。两败俱伤。战胜，使失败：大败敌军。毁坏：败坏。败露。解除，消散：败火。败毒。破旧，衰落，腐烂：败絮。败落。败兴（xìng ）（情绪低落）。腐败。叶残花败。笔画数：8；部首：贝；

bài

1 dishonest or fraudulent conduct by those in power, typically involving bribery: the journalist who wants to expose corruption in high places. the action or effect of making someone or something morally depraved. the corruption of youth was a powerful motif. the word ‘addict’ conjures up evil and corruption. 2 the process by which a word or expression is changed from its original state to one regarded as erroneous or debased: a record of a word’s corruption | [ count noun ] : the term ‘hobgoblin’ is thought to be a corruption of ‘Robgoblin’. the process by which a computer database or program becomes debased by alteration or the introduction of errors. this procedure creates a temporary file to prevent accidental corruption. 3 archaic the process of decay; putrefaction. the potato turned black and rotten with corruption. ORIGIN Middle English: via Old French from Latin corruptio(n-), from corrumpere ‘mar, bribe, destroy’ (see corrupt) .

Iggy Pop – Corruption From the drip drip drip of the teardrops To the chink chink chink of the cash To the end end end of the friendships To the wack wack wack of the bash Corruption corruption corruption Rules my soul Corruption corruption corruption Rules my soul From the tick tick tick of your time's up To the yes yes yes of 'I'll sell' From the fact fact fact of the soulless To the pact pact pact with hell Corruption corruption corruption Rules my soul Corruption corruption corruption Chills my bones Corruption corruption corruption Rules my soul Corruption corruption corruption Chills my bones From the scream scream scream of the babies To the retch retch retch of the youth From the lie lie lie of the righteous To the lost lost lost way I feel Corruption corruption corruption Rules my bones Corruption corruption corruption Chills my bones Corruption corruption corruption Rules my soul Corruption corruption corruption Rules my soul Corruption Corruption Order in the court Decision to abort The monkey wants to speak So speak, monkey speak Speak monkey, speak Speak monkey, speak Speak monkey, speak Everything leads to corruption Everything leads to corruption Corruption

Kinks – Money Corruption We are sick and tired Of being promised this and that. We work all day, we sweat and slave To keep the wealthy fat. They fill our heads with promises And bamboozle us with facts, Then they put on false sincerity Then they laugh behind our backs. Money and corruption Are ruining the land Crooked politicians Betray the working man, Pocketing the profits And treating us like sheep, And we're tired of hearing promises That we know they'll never keep.

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Promises, promises, all we get are promises. Show us a man who'll understand us, guide us and lead us. We are sick and tired Of having to ask them cap in hand We crawl on the floor We beg for more, But still we are ignored. We're tired of being herded Like a mindless flock of sheep And we're tired of hearing promises That we know they'll never keep. We've got to stand together Every woman, every man, Because money and corruption are ruining the land. Show us a man who'll be our Savior and will lead us. Show us a man who'll understand us, guide us and lead us. Show us a man. Workers of the nation unite. Workers of the nation unite. I visualize a day when people will be free And we'll be living in a new society. No class distinction, no slums or poverty I have a vision of a new society. And every home will have a stereo and TV,

A deep freeze, quadrasonic and a washing machine. So workers of the nation unite. I am your man I'll work out a five-year plan So vote for me brothers And I will save this land And we will nationalize the wealthy companies And all the directors will be answerable to me, There'll be no shirking of responsibilities So people of the nation unite. Union man I'll work with you hand in hand For we're all brothers to our union man. I am your man, Oh God how I love this land, So join together save the fatherland. I visualize a day when people will be free And we'll be living in a new society. No class distinction, no slums or poverty, So workers of the nation unite, Workers of the nation unite, People of the nation unite

Police and the law enforcment Fine for making us search you, revealing you had nothing illegal on you... Nigger, please! Corruption! BRUTALITY - Tom ‘Lanky’ B. Corruption = The Congress Party in India Me: Look at all this corruption! Congress party worker : That’s our gift to this country. Me: Who votes for you Swiss bank money stashing, corrupt bastards? Congress party worker: the uneducated, the overtly secular morally coward, Muslims and about any other person who’s ashamed of being an Indian. Me: You bastards!! Congress party worker: Kalyug, beta. Just accept us. - Anna Hazare123

We must uphold the fighting of tigers and flies at the same time, resolutely investigating law-breaking cases of leading officials and also earnestly resolving the unhealthy tendencies and corruption problems which happen all around people. Xi Jinping

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2 peo ple

Leaked China Documents Show Massive Corruption, Officials Fleeing Country Albert Ding & Angela Wang

China Punishes More Than 182,000 Corrupt Officials

A document leaked to The Epoch Times reveals that as of Nov. 26, 2011, Beijing had identified 225 corrupt officials, 58 of them at the local high-level (“ditingji”) and above, who had embezzled over 2.5 billion yuan ($US392 million). Oversight must have been more lax in Anhui Province, which had half as many corrupt cadres—only 97, 19 of them high-level—who’d managed to abscond with 3 billion yuan. But the coastal boom province of Guangdong took the cake: 1,640 corrupt officials, 170 of them high-level cadres, who stole a total of 115 billion yuan (US$18 billion). The numbers come from what appears to be a collection of data, possibly compiled by a state-affiliated research center, that was sent to The Epoch Times on July 12. It came with no explanatory note and was simply identified as “record of corrupt Chinese officials.” The leaked records include the following lists: • Senior high-level (zhengtingji) and above officials, including name, last official post held, and year arrested. • Local high-level officials (ditingji), including name, last post held, amount embezzled, crime charge, and punishment. (In some cases, it simply says “suicide.”) • Officials who have fled China, including name, particulars, and the amount they stole. This group was relatively small fry. The vast majority of them were from stateowned enterprises. The most ambitious was Gao Shan, the president of the Bank of China branch on Hesong Street in Harbin City, who stole $839 million yuan ($131 million). China Bank has about 70 branches in Harbin and over 11,000 across China. • Officials who have been repatriated, including their particulars. Thailand was a common destination of escape and therefore of extradition, with the United States and Australia also assisting in a few extraditions. • Mayors removed from office after being apprehended for corruption. • Officials who have been sent to prison or given the death sentence (sometimes reprieved).

BEIJING — The Communist Party's anti-graft body in China says its work was effective in 2013, and led to the investigation and punishment of more than 182,000 party officials. Last year's crackdown was more intense than the year before, and targeted a number of high level officials from the provincial and central government levels, as well as top executives within China's state-owned firms, according to the CPC Central Commission for Discipline Inspection's 2013 review. The review, issued Friday, is a showcase for China's President Xi Jinping, who has pledged to rid the party of corruption regardless of rank or political clout. Joseph Cheng, professor of political science at City University of Hong Kong, says that the party has worked hard to demonstrate its determination to reduce graft. “One of the most important features of that is to indicate that no matter how high you are, you are still subject to sanctions and prosecution,” says Cheng. Liu Tienan, a vice chairman of the National Development and Reform Commission speaks during press conference Wednesday April 29, 2009 in Shanghai, China. Liu Tienan, a vice chairman of the National Development and Reform Commission speaks during press conference Wednesday April 29, 2009 in Shanghai, China. Huang Shuxian, deputy head of the party's watchdog commission, said that last year, the party investigated 31 high level officials and eight of them are now facing legal prosecution. One of the eight is Liu Tienan, a top economic official whose questionable financial deals were first uncovered by a journalist at a prominent Chinese magazine. Former provincial deputy head Ni Fake, another name on the commission's list, accepted hundreds of thousands of dollars in return for mining rights and land. According to party investigators, some of the bribes came in the form of expensive jade carvings, which Ni liked to collect and showcase in a private gallery. Joseph Cheng says that official pronounce-

ments about targeting both “tigers and flies,” high and low level corruption, leaves people wondering how far Xi Jinping's administration is willing to go. “All eyes are turning actually to the potential prosecution of Zhou Yongkang,” says March 11, 2012 file photo, Zhou Yongkang, then Chinese Communist Party Politburo Standing CommitCheng. tee member in charge of security, attends a plenary Zhou is a former member of the Politburo Standing Committee in charge of the police, session of the National People's Congress at the Great Hall of the People in Beijing, China courts and intelligence services. After his retirement last year, speculations surfaced that he too might be a target of Xi Jinping's anti-graft efforts. A number of Zhou's aids and political allies have been put under investigation since, and Hong Kong media say Zhou himself The information almost certainly does not The phenomenon of “naked officials”— might be under house arrest. come from a government office, according where a cadre’s wife and family is outside of Cheng says that an indictment against the to Heng He, an analyst of Chinese ComChina—also troubles Party disciplinarians, former security bureau tsar would be excepmunist Party (CCP) politics with the New even though it has to some extent infected tional given the high rank Zhou once had, York-based New Tang Dynasty Television. the elite. Research by the Chinese Commubut might also serve President Xi a different A list of officials, including their particulars, nist Party’s Central Committee found that purpose. who overseas with embezzled money. of the 204 Central Committee members, 91 “There is a suspicion that thefled struggle On July 12, The Epoch Times received a percent had relatives who had emigrated against Zhou Yongkang is also an attempt collection records documenting extensive overseas. to limit the immense power in theofhands corruption in the Out of the 127 members of the Central of the public security apparatus, which is Communist Party. (The Epoch Times) Commission for Discipline Inspection, the probably one of the goals in the hands of Xi A list of officials, their particulars, body that investigates corrupt officials, 88 Jinping who wants to concentrate power including in percent had relatives who had emigrated his hands,” says Cheng. who fled overseas with embezzled money. On July 12, The Epoch Times received a overseas. After taking office last March, Xi has been collection of records documenting extensive The data received by The Epoch Times indiconsolidating power by taking a number of corruption in the Communist Party. (The cated that over 7,101 corrupt officials have powerful seats, including the chairmanship Epoch Times) fled to the United States, together bringing of the “leading group for overall reform,” Based on the language and phraseology over 336 billion yuan (US$52.7 billion). The in charge of economic plans and domestic employed in the records, he suggested that United States thus remains the most-fapolicies. the likely provenance was internal materivored destination for fleeing Chinese President Xi is also general-secretary of the al compiled by a Party-affiliated research cadres, but countries with loose immigraCommunist Party and chief of the Central Military Commission. institute. “The full picture of the corruption tion regulations like Cambodia, Thailand, is state-secret,” he said. and Burma (officially called Myanmar) are The Epoch Times checked a random popular for lower-level apparatchiks. sampling of the cases and found mainland In a recent interview with the New York China media reports that corresponded Review of Books, Bao Tong, former director with the names and figures in the leaked of the CCP’s Office of Political Reform and documents. policy secretary of ousted Party leader Zhao Corruption in China is often referred to as Ziyang, said that getting rid of corruption both the lubricant of the Party machine’s would be impossible under one-Party rule. economic growth, but also a factor that may “Because everyone is in one boat, if that precipitate its demise, as ordinary citizens boat turns over, everyone ends up in the become increasingly incensed with an elite water, …” he said, referring specifically to that functions like a kleptocracy, analysts Party officials. “So in China, everyone helps say. each other out. If you are in trouble, I’ll help Party media regularly make noise about the you out, and if I’m in trouble you help me threat corruption poses to the regime, but out.” while the problem stems from the regime “If I were in the current system, I’d be coritself, the Party has never allowed any rupt too. … What they need to do is change genuine mechanisms of oversight outside its the system,” he said. own control. With research by Luo Ya.

Deng Xiaogang, an academic and expert on corruption, said: "The party realises the impact [of abuses of power] on their legitimacy and maintaining their rule." Deng, an associate professor of sociology at the University of Massachusetts, Boston, said China's leders had warned more than two decades ago that corruption threatened Communist rule. Since then the scale had vastly increased, while economic uncertainty and social concerns had given the party "a sense of urgency about the need to do something". But Deng said powerful interest groups could block the changes needed. Many in China say the problem cannot be rooted out unless the party undertakes fundamental political reforms, such as the development of an independent judiciary and media. Wu Qiang, a scholar at Tsinghua University in Beijing. said anti-corruption [campaigns] were used to conceal political struggles inside the ruling Communist party, and such struggles were becoming fiercer. He said the government was seeking to strictly control officials while limiting anti-corruption voices outside the party, releasing news of its achievements to help ease public anger. Wu described the campaign as a populist policy, saying the public response was likely to affect how long it lasted and how deep it went. The current drive would calm down "when it reaches a balancing point – which means when the central government needs to implement other policies, and depending on how local officials follow the orders", he said.

The last national-wide anti corruption movement – The Tiananmen Square protests The Tiananmen Square protests of 1989, commonly known as the June Fourth Incident (六四事件) or more accurately '89 Democracy Movement (八九民运) in Chinese, were student-led popular demonstrations in Beijing which took place in the spring of 1989 and received broad support from city residents, exposing deep splits within China's political leadership. The protests were forcibly suppressed by hardline leaders who ordered the military to enforce martial law in the country's capital. The crackdown that initiated on June 3–4 became known as the Tiananmen Square Massacre or the June 4 Massacre as troops with assault rifles and tanks inflicted casualties on unarmed civilians trying to block the military's advance towards Tiananmen Square in the heart of Beijing, which student demonstrators had occupied for seven weeks. The scale of military mobilization and the resulting bloodshed were unprecedented in the history of Beijing, a city with a rich tradition of popular protests in the 20th century. The Chinese government condemned the protests as a "counter-revolutionary riot", and has prohibited all forms of discussion or remembrance of the events since. Due to the lack of information from China, many aspects of the events remain unknown or unconfirmed. Estimates of the death toll range from a few hundred to the thousands. The protests were triggered in April 1989 by the death of former Communist Party General Secretary, Hu Yaobang, a liberal reformer, who was deposed after losing a power struggle with hardliners over the direction of political and economic reform. University students marched and gathered in Tiananmen Square to mourn. Hu had also voiced grievances against inflation, limited career prospects, and corruption of the party elite. The protesters called for government accountability, freedom of the press, freedom of speech, and the restoration of workers' control over industry. At the height of the protests, about a million people assembled in the Square. The government initially took a conciliatory stance toward the protesters. The student-led hunger strike galvanized

CORRUPTION IS

support for the demonstrators around the country and the protests spread to 400 cities by mid-May. Ultimately, China's paramount leader Deng Xiaoping and other party elders resolved to use force. Party authorities declared martial law on May 20, and mobilized as many as 300,000 troops to Beijing. In the aftermath of the crackdown, the government conducted widespread arrests of protesters and their supporters, cracked down on other protests around China, Unit a common ideology, pass an excellent education. expelled foreign journalists and strictly Art work of Liu Bolin controlled coverage of the events in the domestic press. The police and internal security forces were strengthened. Officials deemed sympathetic to the protests were demoted or purged. Zhao Ziyang was ousted in a party leadership reshuffle and replaced with Jiang Zemin. Political reforms were largely halted and economic reforms did not resume until Deng Xiaoping's 1992 southern tour. The Chinese government was widely condemned internationally for the use of force against the protesters. Western governments imposed economic sanctions and arms embargoes.

Date April 15, 1989 – June 4, 1989 (1 month, 2 weeks and 6 days) Location Beijing 400 cities nationwide Causes Death of Hu Yaobang Economic reform Inflation Political corruption Economic nepotism (especially regarding Zhao Ziyang’s and Deng Xiaoping’s sons) Career prospects Social unrest in Eastern Europe Goals Social equality, “A Communist Party Without Corruption”, freedom of the press, freedom of speech, socialism, democracy Methods Hunger strike, sit-in, occupation of public square

This man was just evicted from Beijing’s college in Beijing that should pay between underground heating system—and there are 3,000 and 4,000 yuan (link in Chinese), many more like him between $490 and $650 a month —about a 1,000 to 2,000 yuan more than what he was Gang Yang and Lily Kuo previously earning. The debate could also further motivate Beijing city officials who In a luxury residential neighborhood in have said that providing more affordanortheastern Beijing, a 52-year-old man ble housing in the city is a top priority. named Wang Xiuqing has been living in the Authorities say they will supply 20,000 underground pipelines (link in Chinese) of cheaper homes (paywall) for “self use”—for the city’s heating system for 10 years. residents to live in, not hold for investment, On Dec. 6, after seeing news reports (Chiwhich drives up prices. nese) of Wang and others’ underground abodes, officials removed the residents and sealed off the manholes leading to their In Beijing, housing is so expensive that mimakeshift homes with concrete. As a result, grant workers are living in bomb shelters Wang and a few others have quickly become the focus of an outpouring of sympathy and Nate Berg anger on Chinese social media (registration required) over the treatment of the city’s The numbers are undeniably mind-bogmany migrant workers. gling: An estimated two million people Because of Beijing’s sky-high apartment in Beijing are said to be living below the rental costs, as many as two million earth’s surface, in thousands of 100-squarepeople—about a tenth of the city’s populafoot spaces located just one or two stories tion—are said to be living below street level below street level. These figures have been in underground storage basements and making headlines (and trending upwards) air-raid shelters partitioned into cramped, for a couple of years now. Assuming they’re windowless rooms. Many of those who accurate, that would mean 10 percent of the have to crowd into these homes are micity’s 20 million people sleep in windowless, grant workers like Wang, from the nearby subterranean residences. province of Hebei. Because of a household That they are there speaks to the crushingly registration system that connects them with expensive housing market in China’s bulgtheir hometowns, they’re often barred from ing top-tier cities. The makeshift conversion using public services like education and of approximately 20,000 antiquated bomb healthcare. shelters and basements across Beijing has On Sina Weibo, the country’s largest also no doubt led to a rise in dangerous microblogging site, photos of Wang’s filthy living conditions: it’s common to find mulbedroom and details of his story circulattiple people sharing these small emergency ed under the hashtag “well-dwelling snail shelters made only slightly more hospitable house,” using a common phrase to describe with space heaters and hot plates. humble, tiny homes. Wang earned his keep The only affordable alternative would be by washing taxis and collecting plastic bot- way out on the city’s periphery. And yet, if tles for recycling, and used the pipes in his you ask them, many of these people, most underground tunnel to keep warm. By Dec. of them migrant workers, will tell you their 9, the hashtag had over 45,000 comments. choice to live underground is vastly better The comments ranged from offers to help than the alternative. the residents find jobs, to criticism of “The plus side for them of living underofficials for sealing off their homes. “Is this ground was, of course, better economic ophow they provide assistance to homeless portunities,” says Annette M. Kim, associate people?” one user said. Others criticized the professor of urban planning at the Maspace of the country’s problems with income sachusetts Institute of Technology. “They inequality. “This problem roots deeply in had multiple jobs in the vicinity, and they the yawning wealth gap rather than illegally didn’t have enough time to travel far.” The residing in the well. The government’s solu- only affordable alternative for most migrant tion is crude and brutal,” another said. workers in Beijing, Kim says, would be way The attention may be helping. According to out on the city’s periphery – beyond the Xinhua, Wang has been offered a job at a Sixth Ring Road – where the combination

Photos of Wang have been circulating on Chinese social media since his eviction from his underground home.Sina Weibo

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Quan Youzhi, 66, was living in one of the underground homes before officials sealed them off. Reuters

of distance and poor transit access creates hours-long commutes. Kim and her team have gleaned these preliminary findings from extensive interviews with about 20 underground Beijing residents. Of the subterranean residents they’ve talked with so far, there are waiters, maids, cooks, salespeople, deliverymen, vendors, construction workers, and security guards. Tenancy in these underground units ranged from just a few days to more than eight years. They’ve also been collecting more concrete data from classified ads for this unique class of housing. Based on an analysis of more than 600 ads posted to the website Ganji. com, the median monthly rent for one of these units is about $64. “Of course there’s a sampling bias with these online ads,” Kim says. “I think they’re going to be on the slightly higher end of the bomb shelter market.” This ad from Ganji.com offers a 10-square-meter room in the basement of a building just outside the 3rd Ring Road for 240 yuan a month, or about $39. A holdover of Cold War anxieties, bomb shelters are still required by Beijing’s official

building code. In the 1990s, the city enacted a policy to open up these spaces for use. But the government has since grown weary of the underground dwellings. In August 2010, the city stopped granting new use permits for these spaces and has a three-year plan to move all the subterranean residents. Kim says many, if not most, remain for now. But the policy raises some questions about the accuracy of the city’s tally of underground residents, which may be inflated to justify evictions. Kim is planning to go back to do more field research this summer to get a better idea of how extensive this lifestyle really is and how the underground dwelling market functions. She hopes to gather more data on transportation access and to look at the relationship between the above- and below-ground local real estate. If indeed there are two million people living underground in Beijing, Kim thinks there may be a way to make this housing stock work better. Or maybe it’s fine as it is, providing exactly what this growing class of migrant workers needs at the right price and location. “I’m still grappling with how to understand it,” she says.

Money is truthful. If a man speaks of his honor, make him pay cash. -

Robert A. Heinlein

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3 Money

A current medium of exchange in the form of coins and banknotes; coins and banknotes collectively: I counted the money before putting it in my wallet | he borrowed money to modernize the shop. (moneys or monies) formal sums of money: a statement of all moneys paid into and out of the account. the assets, property, and resources owned by someone or something; wealth: the college is very short of money. financial gain: the main aim of a commercial organization is to make money. payment for work; wages: she accepted the job at the bank since the money was better. Paper and coinage that can be used to exchange for goods and services. More of it equals power and chicks. “My money got me a wife honey.” by CrazyMike February 10, 2003 The root of all evil. Money; Cant live with it, cant live without it. by *Dee* June 06, 2006 An awesome song by Pink Floyd The song “Money” is on Dark Side of the Moon by A Floydian January 09, 2004

Pink Floyd – Money Money, get away Get a good job with good pay and you’re okay Money, it’s a gas Grab that cash with both hands and make a stash New car, caviar, four star daydream Think I’ll buy me a football team Money, get back I’m all right Jack keep your hands off of my stack Money, it’s a hit Don’t give me that do goody good bullshit I’m in the high-fidelity first class traveling set And I think I need a Lear jet Money, it’s a crime Share it fairly but don’t take a slice of my pie Money, so they say Is the root of all evil today But if you ask for a raise it’s no surprise That they’re giving none away Away, away, away Away, away, away

The only thing very hardly ever refused by anyone. John: Here is proof of fifty thousand dollars buried beneath these shark infested waters. Rex: We have to find a way of dealing with these sharks so we can get to the money. John: Ok. here is plan A. We will... by Nartey April 12, 2007

MONEY_PINKFLOYD_DAVIDHOLLIER

Ivy Levan – Money

Doors – Money

They say that I shot a man down For not picking up the check What they don’t know it won’t hurt them So keep moving down the line Just cause I like my diamonds bright Ain’t saying I’m wrong or if it’s right But baby I haven’t been wrong before

You know the best things in live are free You can give it to the bears and bees I want some money Yeah yeah I want some money Yeah yeah

Cash is everything I need so show me the money! Cash is everything I need so give it to me honey! Oh what you see... is what you get! And you ain’t see... nothing yet!

You all give me such a thrill But your loving can’t pay no bill’s I want some money Yeah I want some money Yeah yeah One time You all give me such a thrill recent years the authorities have taken But your loving can’t In pay my bill’s steps to reform contracting procedures I want some money in order to improve efficiency and curb Yeah corruption. Experiments with open bidding I want some money began in Shanghai in 1996 and spread Yeah alright rapidly to other cities, with a growing pro-

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They say that I broke a man down For not giving me respect Should’ve spent more cause worth it I just ain’t got the time You better choose your battles right Shoot when you see whites’ others’ eyes Oh baby I wish you had the dough But you don’t Daddy ain’t got no cash. Daddy go six foot deep Daddy ain’t got no green. Daddy got to go to sleep. Daddy ain’t got no cash. Daddy ought to go six deep Daddy ain’t got no green. Daddy got to go to sleep. Daddy ain’t got no cash. Daddy go six foot deep Daddy ain’t got no green. Daddy got to go to sleep. Daddy ain’t got no cash. Daddy ought to go six deep Daddy ain’t got no green. Daddy got to go to sleep.

portion of bidding carried out by Internet.

I want some money In 2000 open bidding was introduced into Give me some moneystate-funded engineering projects, when More money babe the Invitation and Submission of Bids Law I want some money came into effect. Most notably, the NPC passed a government procurement act in Yeah yeah June 2002, along with a series of other new One more time

regulations. The new law standardises rules across the country and at all levels of govI want some money ernment, and aims to increase transparency More money babe in public contracting. Money So-called ‘construction markets’ (Jianzhu I like some money Youxing Shichang) have been introduced I want some money in most big cities with the aim of regulating bidding in construction projects and curbAlright ing under-the-table deals. Under the new system, contractors have to win contracts through transparent and fair competition conducted at such trading centres. All procedures are computerised. However, China’s rapid transition has resulted in huge investment in construction, breeding widespread corruption. The volume of government expenditure in public procurement jumped from 3.1 billion yuan (US $0.4 billion) in 1998 to 65.3 billion yuan (US $8.2 billion) in 2001, and is expected to rise to 150 billion yuan (US $18.7 billion) in 2003. Since all levels of administration enjoy overwhelming and barely checked power – and transparency and effective monitoring are generally low – the opportunities for corruption are high, and the task of curbing it Herculean.

Beijing home rents to rise as millions swarm back to work Langi Chiang

average monthly salary in Beijing was 2,523 yuan last year, up 8.3 per cent in nominal terms. The city’s consumer inflation hit 3.3 per cent last year. A report in June by the People’s Daily, the Communist Party’s mouthpiece, warned that rents took up 40 per cent of income in first-tier cities including Beijing and Shanghai and that young people had resorted to sharing squeezed living space with many others to save costs. Many migrant workers live in windowless rooms beneath residential buildings. Wang said he had once seen a 146 square metre, three-bedroom apartment partitioned into 10 separate rooms so that the landlord could charge more rent in total. Beijing’s municipal government has vowed to stamp out such practices this year, in a move that analysts worry will further drive up rents. “I’m afraid my landlord will probably ask for a rent rise this September if I want to renew the contract,” Wang said. He returned to Beijing on Wednesday after 10 hours’ travel by train from his family home in Shanxi province.

The millions of people heading back to work in Beijing this week are likely to push home rents in the capital to a new record. “Landlords often raise rents after the Lunar New Year holiday as demand increases,” said Wang Kangle, a real estate agent working for Homelink in Beijing. “Or if they are willing to compromise a bit on prices, their homes will be rented out very quickly.” That is part of the seasonal cycle in the mainland home rental market. Deals and rentals also rise in summer, when millions of new graduates leave universities for jobs, and then dip during winter. Landlords typically demand an increase in rent when leases are renewed, often once a year. Rents have increased rapidly in the past few years, but the phenomenon attracted little attention from policymakers more preoccupied with fighting property speculation and curbing rising home prices. Some industry analysts argue, however, that increasing rents contribute to worries about a bubbly housing market on the mainland and should be watched more carefully. “People haven’t paid enough attention to it, but we have always been worried about home rental increases,” Harry Lu, president of Century 21 China Real Estate, said last month. “Home rents have gone up fast in the past few years and have hit a dangerous level now. It will probably cause some problems, even becoming a social stability issue.” Official and private estimates of the pace of rent rises vary - as they do for home price increases on the mainland. But they depict a similar trend, with rent growth easing in the past three years from a record pace in 2010. That year, home prices also soared at their fastest clip, riding on loose monetary policy. Homelink said average rents in Beijing rose Unable to afford Beijing's rents, many migrant workers have been driven to live underground. Photo: Reuters 12 per cent last year to 58 yuan (HK$73.70) per square metre. Another top agency, Bacic & 5i5j, estimated rents rose 7.4 per cent to an average of 3,738 yuan per home. The city’s statistics bureau put the annual increase in home rents, part of the local consumer price index, at 6 per cent last year. Data from the bureau also showed the

Brain Failure – Coming Down to Beijing How its so funny how its so lovely How its so pretty how its so junky All the shits happen in this city oh city How did they build it all the buildings Every could be survive new for a second Go away for two weeks cant find your home Welcoming down coming down to Beijing Where you gonna go What you gonna listen What you gonna thrush What you gonna check Buy a DVD back your home Drink coke-cola on your bed coke-cola on your bed

CORRUPTION IS

Hey baby you come in July and December Its not the real time for you human being Hey baby you can light your Phenix cigarettes in the toilet Welcoming down to the Beijing Baby you come on come on come on now right now right here Hey baby you come in July and December Its not the real time for the human being Hey baby you can light your Phenix cigarettes in the toilet Welcoming down coming down coming down Beijing Beijing Beijing Beijing

Compare with Auckland Average Apartment Price Price per M2 City Centre 53,200.00 ¥ Outside of Centre 29,121.55 ¥

+87.68 % +27.74 %

Rent Per Month 1 bedroom City Centre 5,550.31 ¥ Outside of Centre 3,234.76 ¥

-34.46 % -54.31 %

3 bedrooms City Centre 14,061.97 ¥ Outside of Centre 6,771.59 ¥

-8.92 % -42.84 %

Salaries And Financing Average Monthly Disposable Salary (After Tax) 6,124.75 ¥ -68.63 % Mortgage Interest Rate in Percentages , Yearly 6.06 % +6.83 %

Think you’re finding it difficult to get on the property ladder? Landlord turns six-storey building into 55 ‘capsule’ one-room homes that are just 4 metres square… and tenants have to SHARE them Alex Ward For these young professionals fitting into the modern age in China means fitting into a capsule home with an average floor space of just 4.5 metres square. The residents in a building in Wuhan city, Hubei Province in China have their bathroom, kitchen and beds all in that one room, often sharing their living space with at least one other person. With high rents and low wages in the city, people are struggling to find places they can afford to live, driving them to live in the shoebox ‘capsule’ homes. The landlord of this six-storey building divided the building up into 55 capsules.

'Capsule' home: Salesman Li Chenghui eats a sandwich in his room, with the ladder to his bed not far from his toilet

Housing rent-to-price ratio reach record high in Beijing According to a report from China National Radio news, in November the Beijing real estate market again hit record figures for the rent-to-price ratio, reaching a ratio of 1:546, going above 1:500 for the first time. Some areas even reached 1:700. The rent-toprice ratio in January, however, was 1:351, still a 36 percent increase. Insiders believe that there are many reasons causing this phenomenon, but the most important one is the sharply soaring housing prices. In accordance with statistical data from the market research development of Midland Realty, the average price of the second-hand houses in Beijing in the first half of November reached 13,150 yuan per square meter, an increase of 48 percent compared to the beginning of 2009 when the average price was 8,900 yuan, and the average turnover of the second-hand houses surpassed 120,000 yuan a set, reaching 123,000 yuan. The rate even doubled in some areas. The average price for rental housing in Beijing in November stayed at about 2250 yuan a month, a little higher than in last October. Compared to the rising sale prices, the average rental prices were obviously left behind.

CORRUPTION IS

According to data from the research department of the third market of Centaline China in Beijing, the price of medium and high-grade commercial housing in Beijing in October was 16,957 yuan per square meter, a 19 percent increase year-on-year, but the average rental price in October was 43.2 yuan per square meter a month, an increase of 1 percent year-on-year. According to statistics, the rent-to-price ratio of Beijing’s second-hand properties in November reached 1:546, which means that one property can recover the investment cost only 45 years later if it is rented out, without taking into account the interest on the loan. The situation that parts of housings may be hard to recover the investment cost even 70 years later considering the interest. The most important reason causing the phenomenon is that the investors raised the rent-to-price ratio. The different views between Chinese people and foreigners on renting and buying a house has led to the current situation that buying a house has become necessary for most Chinese people, which is also one of the reasons that the rent-to-price ratio on Chinese real estate is far higher than the international standard. However, the analysts at many professional institutions, including Centaline China, believe that increasingly, demand for the investment to enter the market is the most direct reason causing a rapid rise in the housing price and the rental level diverging drastically from the housing price. Currently, the number of speculators has exceeded those who really need an apartment to live in and become major participators in the market. At the same time, panic demand accounted for 30 percent of the total in November. Some people buy apartments no matter where those apartments are located and how high the prices are. They usually depend on bank loans and they also have become key participants in the market in Beijing. Over recent years, more and more people turned their eyes to commercial apartments, and most of them use rent payments to pay bank loans. So many people now

want to rent out their apartments that tenants are able to choose a unit which best fits their needs, and which will inevitably result in a decline in the rental rates for apartments. According to Wu Cunsheng, director of Beijing Maitian Real Estate Company, rail traffic facilities are now extending to more and more places in Beijing, and some demand for apartments in good locations has been offset. In the past, those who worked near the China World Trade Center usually rented an apartment beside Line 1 or 4 of the Beijing Subway. With the completion of more rail projects, however, tenants have a wider range of choices. That is to say, they can consider renting an apartment in nearly any place where there is a subway line. Therefore, tenants do not need to focus on apartments in certain areas any more, resulting in a general decline in the average cost of rent. The upward trend of house prices and the downward trend of average rents combined to result in a higher and higher rentto-price ratio in the residential housing market. “Most people bought houses for the returns on the rising house prices, because rent has stayed at low levels.” A home buyer said that the long-term investment of renting a house out is no longer popular.” Background information Rent to price ratio: the rent to price ratio in the property market means the ratio between monthly rent and total house price. The ratio reflects whether the gap between rent and house price is rational or not, and serves to test whether a region’s housing market operates well or not. People may buy houses for investment, but rent houses in order to live. Consequently, the relationship between rent and house price can reflect the condition of housing market. Generally speaking, the rent to price ratio by international standard is between 1:100 and 1:200, which is called the ratio’s red line. However, the rent to price ratio in Beijing has been higher than the red line since 2004 (comparison is always conducted by means of the inverse of rent-price ratio.)

Corruption is authority plus monopoly minus transparency. -

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CORRUPTION IS

Innovation or Rent-seeking? The Institutional Environment and Entrepreneurial Behavior during Chinaâ&#x20AC;&#x2122;s Economic Transformation

China: Rent-seeking in the Making Fred Harrison It happened in Europe in the 16th century. It happened in Russia in the 1990s. And now it is happening in China before our very eyes – the predatory rent-seeking culture being incubated to divide a nation between rich and poor. But the game is not yet up for China. Can the Politburo pull off an historic victory to launch their nation in a post-capitalist direction? The concept of rent-seeking was coined by post-classical economists to disguise the attractions of rent as the correct source of public revenue. Rent-seeking is a term now employed to characterise all forms of privileges. But the primary rent-seeking activity is the one that begins with the de-socialisation of land and the privatisation of the rents that a population creates through its co-operative activities. The formation of the rent-seeking culture can be monitored in China in the finest detail. Over the past 20 years, the traditional holdings of farmers were appropriated by corrupt local officials who sold parcels of under-priced land to developers. That left the margin of profit to go into the back pockets of bureaucrats. The psychology of land speculation penetrated the up-and-coming middle class. They figured out that the state was derelict in its duty to protect the population’s collective interest in land. So there emerged a new economic sport. It’s called buy-to-let. People borrowed money and purchased properties to build portfolios that generated rents. China fell victim to the property boom/bust cycle.

Rent-seeking In economics (see public choice theory), rent-seeking is spending wealth on political lobbying to increase one's share of existing wealth without creating wealth. The effects of rent-seeking are reduced economic efficiency through poor allocation of resources, reduced wealth creation, lost government revenue, increased income inequality, and national decline. Current studies of rent-seeking focus on the manipulation of regulatory agencies to gain monopolistic advantages in the market while imposing disadvantages on competitors. The term itself derives, however, from the far older practice of gaining a portion of production through ownership or control of land. The idea of rent-seeking was developed by Gordon Tullock in 1967. The expression rent-seeking was coined in 1974 by Anne Krueger. The word “rent” does not refer here to payment on a lease but stems instead from Adam Smith’s division of incomes into profit, wage, and rent. The origin of the term refers to gaining control of land or other natural resources. Georgist economic theory describes rent-seeking in terms of land rent, where the value of land largely comes from government infrastructure and services (e.g. roads, public schools, maintenance of peace and order, etc.) and the community in general, rather than from the actions of any given landowner, in their role as mere titleholder. This role must be separated from the role of a property developer, which need not be the same person, and often is not. Rent-seeking is an attempt to obtain economic rent, (i.e., the portion of income paid to a factor of production in excess of that which is needed to keep it employed in its current use), by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. Rent-seeking implies extraction of uncompensated value from others without making any contribution to productivity. In many market-driven economies, much of the competition for rents is legal, regardless of harm it may do to an economy. However, some rent-seeking competition is illegal –

such as bribery, corruption, smuggling, and even black market deals. Rent-seeking is distinguished in theory from profit-seeking, in which entities seek to extract value by engaging in mutually beneficial transactions. Profit-seeking in this sense is the creation of wealth, while rent-seeking is the use of social institutions such as the power of government to redistribute wealth among different groups without creating new wealth. In a practical context, income obtained through rent-seeking may of course contribute to profits in the standard, accounting sense of the word.

Examples

CORRUPTION IS

An example of rent-seeking in a modern economy is spending money on political lobbying for government benefits or subsidies in order to be given a share of wealth that has already been created, or to impose regulations on competitors, in order to increase market share. A famous example of rent-seeking is the limiting of access to lucrative occupations, as by medieval guilds or modern state certifications and licensures. Taxi licensing is a commonly-referenced example of rent-seeking. To the extent that the issuing of licenses constrains overall supply of taxi services (rather than ensuring competence or quality), forbidding competition by livery vehicles, unregulated taxis and/or illegal taxis renders the (otherwise consensual) transaction of taxi service a forced transfer of part of the fee, from customers to taxi business proprietors. The concept of rent-seeking would also apply to corruption of bureaucrats who solicit and extract ‘bribe’ or ‘rent’ for applying their legal but discretionary authority for awarding legitimate or illegitimate benefits to clients. For example, tax officials may take bribes for lessening the tax burden of the tax payers. Regulatory capture is a related concept which refers to collusion between firms and the government agencies assigned to

regulate them, which is seen as enabling extensive rent-seeking behavior, especially when the government agency must rely on the firms for knowledge about the market. Studies of rent-seeking focus on efforts to capture special monopoly privileges such as manipulating government regulation of free enterprise competition. The term monopoly privilege rent-seeking is an often-used label for this particular type of rent-seeking. Often-cited examples include a lobby that seeks economic regulations such as tariff protection, quotas, subsidies, or extension of copyright law. Anne Krueger concludes that, “empirical evidence suggests that the value of rents associated with import licenses can be relatively large, and it has been shown that the welfare cost of quantitative restrictions equals that of their tariff equivalents plus the value of the rents” Economists such as the chair of British financial regulator the Financial Services Authority Lord Adair Turner have argued that innovation in the financial industry is often a form of rent-seeking.

Time to Change Course? The Communist Party still rules the political roost. And, constitutionally, all the land of China is legally the property of all citizens. So, in practice, there is still time for China to change course. According to the new premier. Li Keqiang, the time has come to confront the corruption that is separating the people from the party. He recently declared: “Such a state of affairs is not good for government efficiency, it might create opportunities for corruption or rent-seeking behaviour and it harms the image of the government”. There is one way only to terminate the trend which threatens the future of the Communist Party: re-socialise the rents and privatise people’s earned incomes. That would be a tough feat even for the authoritarian communists to accomplish. For, as Mr. Li acknowledged, it is “harder to tackle vested interests than to touch a person’s soul”. The Communist Party of China is the last bastion of the materialist ideology. It would be ironical if the communists managed to build their way to the post-capitalist state by touching the souls of their people.

Innovation or Rent-seeking? The Institutional Environment and Entrepreneurial Behavior during China’s Economic Transformation* Jinglian Wu, Shaoqing Huang

* This paper is a revised version of the working paper submitted to William Baumol’s Special Session on Entrepreneurs, Innovation, and Growth (Annual Conference of the American Economic Association, 2006). The authors give special thanks to Dr. Ying Lowery of the U.S. Small Business Administration, the organizer of the session, for her invitation and several helpful academic discussions; and to World Bank senior economist Leora Klapper for her comments at the conference. We also thank Dr. Zhu Aiping for her help in data collection. Of course, the authors accept all responsibility for the contents of this paper. ** Jinglian Wu, senior research fellow at the Development Research Center (DRC), Beijing, and chair professor of Bao-Steel at the China Europe International Business School (CEIBS), Shanghai; Shaoqing Huang, research fellow at the China Europe International Business School (CEIBS), Shanghai. Abstract Despite its impressive economic growth, during the economic reform period China has been plagued by rampant corruption and a widening income gap. How can the coexistence of these two contradictory phenomena be explained? In this paper, we argue that prior to 1994, they were due to a series of expediential institutional arrangements to stimulate entrepreneurial activities and after 1994, they were due to the slow progress in the overall reform to effect a transition to a market economy because of inappropriate government actions and a lack of institution building. In order to solve these social problems, market institutions need to be improved and economic and political reforms need to be promoted to build the rule of law. 1. Introduction: the enigma of the Chinese economy China’s economic growth and social development over the past almost 30 years has resulted in the following mixed picture: On the one hand, the Chinese economy has recorded strong growth since the late 1970s when the reform and opening-up first began. The 1978-2004 period witnessed an annual growth rate of 9.4% for China’s real GDP, with per capita real GDP

rising 8.2% annually1; the growth rates of the per capita “disposable income” of urban residents and the “net income” of rural residents grew 6.8% and 7.1% annually, respectively, in real terms2. From 1978 to 2003 the per capita housing area increased from 6.7 to 23.7 square meters for urban residents3 and from 8.1 to 27.2 square meters for rural residents. The adult literacy rate increased from 77.7% in 1990 to 90.9% in 20024. Moreover, significant achievements were also made in poverty reduction. According to China’s official standard and the UN threshold, China had 85 million and 280 million people respectively living in poverty in 1990. These figures were reduced to 28 million and 88 million respectively by 20025. Such accomplishments enabled China to play an important role in global economic integration and world economic growth. On the other hand, there are also many noteworthy problems in the Chinese economy: corruption and the widening income gaps, to name the most outstanding. Corruption became an acute social problem in the late 1980s and further rampaged in the 1990s. Many officials are indicted every year because of involvement in corruption and bribery. According to official Chinese sources, from 1998 to 2002 the number of corruption and bribery cases heard and adjudicated by local courts at different levels stood at 99,306, and more than 2,662 officials above the division-chief level were punished, an increase of 65%over the previous 5-year period6. Meanwhile, the gap between the rich and the poor, as measured by the Gini-coefficient, has been widening rapidly, jumping from 0.30 in 1982 to 0.45 in 20027. The polarization of income distribution worsened, with the richest 10% of families consuming 5.66 times as much as the poorest 10% of families in 2003, an increase from 2.42 times in 19918. To the extent that the rapid economic growth would have been impossible without entrepreneurial innovation and that the corruption is linked to entrepreneurial rent-seeking activities, the following question arises: Why have some entrepreneurs engaged in productive activities that have contributed to economic development, while at the same time a great amount of entrepreneurial talent has been devoted to rent-seeking activities? How can we interpret the coexistence of these two extremes? In this paper, we attempt to address this enigma within the theoretical framework of entrepreneurial talent allocation developed by Schumpeter, Baumol, and Murphy et al. Since the publication of Schumpeter’s work (1934), it has been commonly accepted that entrepreneurial talent is the most important factor contributing to economic growth. Baumol (1990) extends Schumpeter’s framework by pointing out that the entrepreneurial talent that exists in all societies is allocated among productive and non-productive activities in different ways under different institutional environments, that is, the prevailing rules of the game and the determined payoff structure, with the objective of maximizing entrepreneurial returns (including wealth, power, and prestige). Murphy, Shleifer, and Vishny (1991) detail how the payoff structure that influences the allocation of entrepreneurial talent between

1 National Bureau of Statistics, China Statistical Yearbook 2005. 2 UNDP and China Development and Research Foundation (2005). 3 National Bureau of Statistics, China Statistical Yearbook 2005. 4 UNDP (2005). 5 Data from the World Bank database. 6 Data from the report of the Chinese Supreme Court to the National People’s Congress. See http://www.court.gov.cn/ work/200303280001.htm 7 See UNDP and China Development and Research Foundation (2005). 8 National Bureau of Statistics, China Statistical Yearbook 1992, 2004.

productive and rent-seeking activities is determined. They argue that due to the increasing returns to ability, the size of the market is the first factor that determines the attractiveness of an occupation to talent. Thus, the larger the size of the market, the more attractive the occupation is to talent. The second factor is the size of the firm that can be established within a particular sector. The larger the size of the firm, the more attractive the sector is to talent. Finally, the attractiveness of a sector also depends on the nature of the compensation contract. The more that the returns to ability can be captured, the more attractive is the sector. Murphy, Shleifer, and Vishny further argue that the allocative structure of entrepreneurial talent has an important bearing upon economic growth. Acemoglu (1995) expresses similar views. This paper is structured as follows: In Part II we discuss the dual impacts on the allocation of entrepreneurial talent by the government-led institutional arrangements in China prior to 1994; in Part III we analyze how the delayed implementation of reform in recent years has led to the spread of corruption. A brief conclusion is provided in Part IV. 2. Dual impacts of the expediential institutional arrangements prior to 1994 Before the reform, the Chinese economy was entirely organized, in the words of Lenin (1917), as a “state syndicate,” with all economic resources held by the government. The consequence of such an organizational form was that the only way for the people to give full play to their talent was, as stated by former President of the PRC (People’s Republic of China) Liu Shaoqi, to “join the Communist Party and to become officials,” or, in other words, to become members of the bureaucratic system. Even in the state sector, there was little scope for productive activities other than through the bureaucratic system. Of course, this is not to say that the most talented people all found places within the government bureaucracy, which offered the highest returns to ability prior to the reforms> This was due to a number of factors, including the political system, the household registration system (hukou), and the closure of higher education during the “Cultural Revolution.” As a result of these factors, a large number of talented people with entrepreneurial ability remained as workers or peasants, and were denied opportunities to maximize the returns to their ability. To reverse this trend, the Chinese reform did not follow a “big bang” or “shock therapy’’ approach; instead, it adopted an incremental reform strategy to increase market functions in a step-by-step manner through a number of skillful expediential institutional arrangements while the government still firmly maintained control over the economy. 2.1 The government-led expediential institutional arrangements After the “socialist transformation of agriculture, handicrafts, and capitalist businesses” in 1956, individuals were deprived of any opportunities to realize their entrepreneurial potentials in production through market mechanisms, and there was no possibility to maximize returns to ability by becoming

an entrepreneur. However, this situation changed after the reforms of the late 1970s. First, facing the pressures of urban unemployment, the central government began to allow the surplus labor in the urban areas to engage in private businesses in services and handicrafts. In 1981, sole proprietors were allowed to employ up to 7 workers9. But due to the rapid development of this private sector, the number of employees in many private enterprises exceeded this limitation. By the mid1980s, the Chinese government was conferring a legal status to private entrepreneurial activities. But legal status alone was insufficient to mobilize the establishment of private businesses when they were still denied channels to access resources and markets. Therefore, in the late 1970s and early 1980s, despite the predominance of the state sector, the Chinese government implemented a number of expediential institutional arrangements. These allowed private business undertakings to reap high returns, thus leading to changes in the allocation of talent, as talented individuals began to engage in private business ventures. The first key expediential institutional arrangement was an administrative decentralization that granted local governments decision-making power over a larger scope of fiscal and planning issues, which provided an incentive to the local governments to protect or support the development of private business. In a classical planned economy, economic decision-making power is highly vested with the central government, in a structure that is similar to a unitary-form firm. During the 1958-76 period, several rounds of administrative decentralization transferred some decision-making powers from the central government to the local governments. In 1980, the Chinese government carried out important reforms of the “unified state control over income and expenditure” fiscal system, such that, with the exception of the three central-level municipalities (Beijing, Tianjin, and Shanghai), tax revenue was distributed between provincial governments and the central government in a predefined way. Since then, provinces, cities, and counties have become economic entities with independent economic interests, and the Chinese economy has been transformed from a U-Form economy to an integrated system encompassing various independent sub-systems10. Because this is similar to a multi-divisional structure in an enterprise, some economists (e.g., Qian and Xu, 1993) have referred to it as an “M-form economy,” as distinguished from a U-form centrally planned economic system11. They pointed out that because the local governments were given quasi-autonomy, they had incentives to create or support market-oriented companies outside of the state-owned sector so as to develop the local economy. The second key expediential institutional arrangement was the dual-track system in the distribution and pricing of the means of production. During the period of China’s centrally planned economy, all material and capital resources were owned by the state and they were distributed according to administrative instructions. As the reform of state-owned enterprises (SOEs) rolled out in the late 1970s and early 1980s,

9 The 1981 State Council “Policies regarding Urban Non-agricultural Self-employed Businesses” state that self-employed business households “may invite one or two assistants when necessary, and may have two to three but not more than five apprentices,” implying that the total number of employees, assistants, and apprentices could not exceed seven. The hiring of eight or more workers was regarded “exploitation.” 10 Wu Jinglian (2005, pp. 44-73) elaborates systematically on the various types of administrative decentralization reforms in China during the 195876 and 1980-95 periods. 11 In our view, it may be more appropriate to call this structure a holding form (H-Form).

the government began to allow SOEs to sell their products beyond the state plans at “negotiated prices” in an effort to increase managerial autonomy and a sharing of profits. This created a de facto “second track,” or market track, for material distribution and pricing. In 1985 this dual-track system became official, making it possible for private enterprises to purchase the means of production and to sell their products via a market track, and therefore creating a basic environment for marketized production activities. In addition to administrative decentralization and the dual-track system, the Chinese government also implemented a “contracting system” in the SOEs, whereby the government transferred control to the management of the SOEs for the period covered by the contract, together with a large portion of the residual claim, thus allowing the SOEs to retain whatever profits that exceeded predetermined targets. 2.2 The incentive effect of the expediential arrangements on entrepreneurial innovation 2.2.1 The impact on entrepreneurial innovation and the allocation of talent Examining Murphy et al.’s various factors that are conducive to innovation listed above, we find that when compared with a traditional centrally planned economic system, the expediential arrangements tended to raise the returns to entrepreneurs for engaging in innovative activities based on three dimensions: size of the market, size of the firm, and the compensation contract. First, the dual-track system generated an increasingly expanding product market. Therefore, the space in which entrepreneurs could give play to their talents grew as the number of products traded on the market track increased12. In a continuously expanding market, individual entrepreneurs could naturally expect rising returns from productive activities, thus attracting more talent to the field of entrepreneurial innovation. Second, the dual-track system created a factors market within a limited scope, which enabled entrepreneurs to increase the size of their business undertakings and strengthened incentives for creating new businesses. Third, under the administrative decentralization system, local government officials had greater autonomy to support the productive activities of entrepreneurs. Typically, this involved two types of supports. The first was to provide political protection (including property rights protection) to non-state enterprises. The political protection ensured that the returns to private entrepreneurs for their innovative activities were not confiscated. The second type of support helped those who established individual businesses access the necessary resources for productive activities. As an example, the TVEs (township and village enterprises), which required external funds to expand their business size, could raise funds by obtaining loans from governmental financial institutions with the help of local governments. Therefore, these expediential institutional arrangements raised the returns to the innovative activities of entrepreneurs

and transformed the allocation of Chinese entrepreneurial talent into innovation and rent-seeking activities. As the government allowed for private business creation and the returns to the productive activities of private entrepreneurs increased, capable members of the society left their previous occupations to become entrepreneurs. First, farmers, who had suffered from the greatest degree of uncertainty and the lowest returns under the central planning system, had the greatest incentives to engage in business creation. Second, among the urban population, those with entrepreneurial talent but who had been excluded from SOEs or public service units because they did not belong to the “leading classes” or for other reasons turned to entrepreneurial activities. Third, governmental officials or SOEs staff who had the lowest rent-seeking capacities due to reasons of family background, work experience, or social connections also turned to productive innovation. Such changes continued until on-the-margin returns to productive innovation and rent-seeking activities were equalized. Statistical data show that there were only 1.83 million business households in China in 1981. Four years later in 1985, this number had jumped to 11.71 million, an annual increase of 159 percent. At the end of 1989, the year of political turbulence, the number of business households stood at 12.56 million, and the number of private enterprises was 91,000. After 1992, the overall environment for business creation improved. By 1998, the number of business households further surged to 31.2 million, or 17.05 times the number in 1981, and the number of private enterprises reached 1.2 million, or 13.2 times the number in 198913. This was clearly a result of the reallocation of entrepreneurial talent from other areas to productive activities. 2.2.2 Main types of entrepreneurial innovation prior to 1994 and their impacts Here we focus on the three applications of Chinese entrepreneurship to innovative activity under the expediential arrangements noted above. Institutional innovation In the early years of China’s economic transformation, due to the absence of formal market-supporting institutions, Chinese entrepreneurs created a series of informal institutions to reduce transaction costs. These included: (a) Informal institutions for property rights protection. In an environment where private property rights were not accepted by the official ideology, the government often violated the private property rights of entrepreneurs. During the early years of the reform, entrepreneurs in various fields thus utilized a number of methods to overcome such ideological barriers. In southern Jiangsu province and northern Zhejiang province, for example, entrepreneurs pursued business activities as TVE contractors. In southern Zhejiang province, entrepreneurs often affiliated their businesses with publicly-owned enterprises, by paying “management fees,” in order to make their “private businesses” have a “public face,” a so-called “red hat.” Also, some entrepreneurs formed contracts with poorly managed SOEs so as to receive protection for their businesses (Krug and Polos,

12 In 1992, the amount of capital goods sold at government fixed or guidance prices accounted for 26.2% of the gross sales of capital goods in the society, while the amount of capital goods sold at market prices accounted for 73.8％. By 1996, the proportion of goods sold at market prices exceeded 80％. See Lin, Cai, and Li (1999, p. 172). 13 The statistical authorities of the Chinese government classify private enterprises with less than eight employees as “business households.” In the official statistics, only private enterprises with more than eight employees appear as “private enterprises,” for which data were not available until 1989. In fact, private enterprises with more than eight employees prior to 1989 were registered as “business households.” We thank Xiaolu Wang for pointing this out to us. Data here are from the State Administration for Industry & Commerce (1986-2002).

2000). (b) Informal contract enforcement institutions. The absence of an effective judicial system rendered it impossible for entrepreneurs to do business under the purview of the courts. Therefore, some private entrepreneurs often took the initiative to forge reciprocal relationships of repeated transactions with certain partners. In some regions, such as Wenzhou of Zhejiang province, where social networks are characterized by close interpersonal relationships and information sharing, private businesses established transactional networks with local enterprises. Gradually, reputable bilateral and multilateral mechanisms based on social networks or business networks developed. (c) Institutions to access to finance. As the stateowned commercial banks rarely provided financial support to private enterprises, the latter were forced to secure financing through informal channels. According to a survey by the International Finance Corporation in 1999, 90 percent of the capital in the early stages of these firms came from the entrepreneurs themselves, their partners, or their family members (Gregory and Tenev, 2001). In addition, entrepreneurs also made efforts to find external sources of capital, one of which was commercial credit. Delayed payments by private businesses, normally by two to three months, became a commonly accepted practice. Sometimes private businessmen also made use of traditional or primitive forms of commercial lending, such as â&#x20AC;&#x153;rotation societiesâ&#x20AC;? (yaohui). Clearly, all three of the above-described institutional innovations raised the returns to productive activities and led to a shift from rent-seeking to production on the part of entrepreneurs. Opening new markets As the market track for the distribution and the pricing of products emerged, entrepreneurs quickly seized potential profitable opportunities from the price signals. On the one hand, they employed more workers whose costs were lower, and, on the other hand, they continuously opened new markets for goods and services that were in short supply and engaged in the production of various daily-use products, as well as businesses such as trade, restaurants, and transportation. Private entrepreneurs in Zhejiang province played a prominent role in developing new markets. As soon as government policies toward the private sector were liberalized, many farmers in the province began to utilize their limited resources to produce small daily-necessity goods in manual workshops. In Wenzhou, a large number of domestic and international traders began to frequent the Qiaotou town market for buttons, the Liushi town market for low voltage electrical appliances, and the Yishan market for recycled acrylic fibers. To support their production and sales, local firms in Wenzhou dispatched some 140,000 farmers-turned-salesmen and procurement personnel all over the country to forge a huge network of sales and purchases. Similar to Wenzhou, Yiwu is a region with poor resources endowment but a rich business culture among farmers who traditionally conducted business as street vendors and at fairs. In the early 1980s, Yiwu took the lead in China in creating a market for small commodities, with strong support from the local government. There were over 1,800 vendor

slots in the market in 1984, increasing to over 17,000 in 1992 after many rounds of expansion, and with total sales of over RMB 2 billion14. The accumulated capital enabled the farmers-turned-entrepreneurs to enter industries like automobile manufacturing and aviation transportation that had long been forbidden to the private sector. Technology introduction and technology innovation In the early years of the transformation, the main channel for private enterprises to obtain technologies was by purchasing machinery and equipment discarded by the SOEs and by inviting SOE technicians to provide field instructions. At the beginning of the 1990s, however, some private enterprises began to engage in independent technological innovation to build up their own core competitiveness. Around the turn of the century, China emerged as a strong force in independent innovation. In telecommunications equipment manufacturing and the auto industry, the pioneers in independent innovation were the private enterprises created and run by private individuals, for example, Huawei Technology and Geely Holding Group, instead of the well-equipped SOEs with strong financial backing. The movement of the most talented individuals out of agriculture and the low-efficient state-owned industries to business creation improved resource allocation, accelerated technological progress, and raised the overall level of efficiency and economic output. The boom in business creation sustained a continuous rise in the share of private sector output in GDP. In the 1970s, the added value of the private sector in GDP had been negligible, but it increased rapidly after the beginning of the 1980s. The added value produced by the private sector accounted for 33.8 percent of Chinaâ&#x20AC;&#x2122;s GDP in 1990, before further surging to 47.5 percent in 200115. Thus, the private sector had become the main force behind Chinaâ&#x20AC;&#x2122;s economic growth. This was most noteworthy in the coastal provinces such as Zhejiang, Guangdong, and Jiangsu. Take, for example, Zhejiang province, which boasted the most rapid private-sector development in the entire country. For several years, Zhejiang enjoyed a GDP growth rate of over 10 percent due to the ever-expanding private sector. Currently, the per capita GDP and the disposable income in Zhejiang rank first among all the provinces, following only the major cities of Beijing and Shanghai16. According to a UNDP and China Development Research Foundation study (2005), the Human Development Indexes of those provinces with more rapidly developing private sectors are at the top of the country. 2.3 The effect of expediential institutional arrangements on entrepreneurial rent-seeking activities 2.3.1 The impact on the returns to rent-seeking activities by entrepreneurs The expediential institutional arrangements remained limited when compared with the market economies based on the rule of law. To a large extent, the government still played a dominant role despite the introduction of the market. First, the government continued to hold power to allocate a large amount of the production resources, especially capital and land, and

14 Data from Cheng Bingqin and Lai Cunli (1997, pp. 16-22). 15 Wu, Jinglian(2005, p.89). 16 Wu, Jinglian (2005, pp. 200-201).

entrepreneurs had to pay extra “rent” for access to these resources. Second, in some important sectors and markets, the government continued to allow SOE dominance or even monopolies, so that the entry of private enterprises was severely restricted. Private entrepreneurs were therefore forced to seek special policy favors from government officials. And finally, the delegation of decision-making power to and profit-sharing with SOE management led to soft-budget constraints and blurred the boundaries of property rights, opening the door for de facto insider control and the stripping of state assets. All of these factors helped raise the returns to rent-seeking activities, thus leading more entrepreneurial talent to engage in such activities. First, in terms of the market size of the rent-seeking sector, because the government still controlled the allocation of many production resources, the shift of a large number of talented people to productive entrepreneurial activities, which raised the size of the economic output, resulted in the “cake” in the hands of the rent-seeking sector appearing to be larger than ever. Second, in terms of the firm size of the rent-seeking sector, although the reform restored some civil rights to the society, the checks and balances over governmental officials remained very weak. Thus, the size of official rent-seeking organization expanded rapidly. Finally, in terms of the nature of the compensation contracts, in the absence of checks and balances of power, most benefits from the official rent-seeking activities could be retained by the rent-seekers. Although some rent-seekers lost their profits and sometimes even their positions due to the government-led anti-corruption campaigns, rent-seeking activities did not weaken as long as the total sum of the rent continued to increase. Therefore, after the start of the reforms, the rent-seeking sector remained an attractive option offering high compensation for talented people, thus explaining why many thousands of applicants continued to compete for the few governmental positions in the process of the civil servant recruitment. The high returns to rent-seeking activities led some talented personnel who had been assigned to the rent-seeking sectors under the planning system either to remain in their positions or to “go into the sea of business17.” Furthermore, these high returns tended to attract those who under the previous system had been locked out of both official and non-official rent-seeking sectors. 2.3.2 Specific forms of rent-seeking prior to 1994 “Official profiteering activities” under the dual-track system Although the dual-track system paved the way for the allocation of production materials to private entrepreneurs according to market prices, the government still retained power to allocate resources to predetermined enterprises at much lower prices, thus enabling some individuals to use their administrative power for their personal interests through rent-seeking. For example, in 1985 (when the dual-track system was officially established), the market price for steel was twice as high as the government price, which meant that a 100 percent margin could be gained by selling steel from the planned track to the market track. This margin could be shared between rent-seek-

ers and those officials who had the power to sign the approval documents (piwen) for the low-priced resources. Those who had access to and sold such approval documents could reap huge profits18. From the mid-1980s to the mid-1990s, this dual-track system applied not only to resources distribution and pricing, but also to foreign exchange transactions. There were even official and market interest rates for bank loans. According to Heli Hu’s calculations, the total rent of the entire nation during the 1987-88 period amounted to 20-40 percent of the national income19. Since the 1990s, the dual-track prices have been merged and the product market has been opened up and liberalized. However, the dual-track system in terms of the distribution and pricing of land and capital has continued to generate rent-seeking and corruption. Because the land-pricing power is actually held by a small number of government officials, the buying and selling of land has become notoriously corrupt in many areas. Anpei Wan estimates that the total rent from the rampant land speculation in the early 1990s accounted for some 32 percent of the national income20. Great losses of state-owned assets due to the “delegation of power and sharing of profits” reform During a long period of China’s reform, the government followed the approach of “delegating power to and sharing of profits with” SOEs, through the implementation of a number of reform measures, such as the “contracting system,” “authorized operations,” and “authorized management,” in an attempt to “mobilize” SOE managers to engage in productive activities. However, these reform measures also enabled SOE managers to make use of their control rights to encroach upon public property via various means. One common way was to transfer benefits from the “national treasury” to their “own people.” Typically, “the profits would flow to their own small cashboxes, while the losses would be left for the state to bear.” For example, in recent years state-owned securities or futures companies have accumulated billions of non-performing assets for which the government will have to “pay the bill.” Another way to encroach upon public property was through subsidiaries. Thus, a manager “authorized” by the government to run a SOE would create a subsidiary and appoint his henchman to manage it with full authority, who would then do the same for himself by creating another subsidiary tier. In so doing, they collectively created a hierarchy of subsidiaries, known as “multi-tiers of the legal person system,” which could have as many as more than ten tiers. In such structures, the owner had no checks and balances over management, opening the door for the loss of public assets. It is clear evident that, on the one hand, such expediential institutions created conditions to shift Chinese economic growth to a higher level, but, on the other hand, they led also to the emergence of endless rent-seeking activities. The rampant rent-seeking not only hurt the potential of the Chinese economy but also became a fuse for social and political instability, thus necessitating the urgent promotion of an institution-building reform.

17 The business sector is often referred to as the “sea” in Chinese. “Going into the sea” means turning to business activities, which is often a way for former officials to turn their connections in the government into business profits. 18 During the 1980s when arbitrage approval documents were required, these people were called “official profiteers” (guandao), referring to arbitrageurs backed by official power. 19 Hu Heli (1989, pp. 20-46). 20 Wan Anpei (1995, pp. 331-364).

3. Recent observations since 1995: inappropriate or lack of action by the government to build institutions created new incentives for rent-seeking The negative impacts of the expediential arrangements on the functioning of the market gradually became obvious as early as the mid- to late 1980s. Thereafter, many economists appealed for a further deepening of the economic and political reforms and for the building of a market economy based on the rule of law21. However, some argued that all these problems were the results of market failure and the only way to resolve them was to further strengthen government administrative intervention in micro-economic activities. Since 1995, in particular in the more recent years, governments have indeed strengthened administrative intervention in many areas, while failing to provide the prerequisite legal environment in a timely manner. In this sense, it is fair to say that inappropriate and/or lack of action on the part of government to build institutions provided additional incentives for entrepreneurs to engage in rent-seeking activities. 3.1 Inappropriate actions by government 3.1.1 The strengthening of the power of administrative departments to allocate resources The first area in which the power of resource allocation by administrative departments was strengthened was land resources. Since the turn of the century, China’s urbanization has clearly accelerated, bringing about a sharp rise in demand for land. This in turn has led to an unprecedented wave of land acquisitions: local governments at various levels have set up development zones by acquiring land from farmers at low prices and leasing it to industrial and commercial companies or to real estate developers. It was reported that at the end of 2003, there were over 900 “development zones” at or above the provincial level across the country, controlling 360 million square kilometers of land (another 1,800 zones at lower levels are not included in this calculation)22. Because they held the power to ratify the leasing of land, governments held a monopoly over urban land allocations for industrial or commercial purposes. Second, administrative departments have also been directly involved in the allocation of financial resources. China’s four major state-owned commercial banks were supposedly commercialized by 1995. In reality, however, governments at various levels still intervene in bank operations. Most of their loans are directed to the SOEs, and the expanding private sector still encounters difficulties in accessing bank loans, resulting in a mismatch between the lending structure of the banks and the structure of the economy. One estimation indicates that in the mid-1990s, the “big four” state-owned banks allocated 70-80 percent of their loans to SOEs, accounting for around 30 percent of GDP. To support local interests, many local governments even encouraged local SOEs to dodge their repayment obligations to the state-owned commercial banks through various kinds of trickery, including the filing of bankruptcy. In the mid-1990s when China’s stock markets were reopened, a company would have to go through reviews and approvals by many administrative departments

of the central and local governments before it was allowed to raise funds and list on the market (also, prior to 2000,reviews and approvals were required to receive a fund-raising quota from the government). Even in more recent years, many local governments still take advantage of their administrative power to provide financial resources to their favorite enterprises by appropriating social security funds, which is a violation of the relevant regulations. In order to accelerate the growth rate of the local economy, local governments at various levels tend to impart favorable treatment to their selected enterprises in terms of land acquisitions, fund-raising, taxes, and employment. As private enterprises have continued to grow, the SOEs are no longer the targets of such biased policies. Any enterprise can now benefit from government support, thus unprecedentedly strengthening government capacity to intervene in micro-economic activities. 3.1.2 The increased administrative licensing power of the government The Chinese government has long restricted private enterprises from entering so-called “strategic industries.” With the ideological hostility against private ownership, entry barriers in over thirty sectors by different levels of government to varying extents helped the SOEs maintain a monopoly in those sectors that turned out huge profits. In the late 1990s, as the legitimacy of the private sector was further acknowledged and the government prepared for its post-WTO opening up to foreign investment, the central government eventually agreed to open up most sectors and markets to the domestic private sector. Nevertheless, private enterprises still are required to apply for licenses and approvals to gain access to these sectors and markets. Such approvals are critical to the life or death of these enterprises. By the turn of the century, a consensus had gradually emerged in Chinese society that rent-seeking on the basis of administrative power was the main source of the spreading corruption during China’s transition. In 2000, the CPC’s Central Commission on Discipline Inspection put forward the notion of “fighting corruption at the roots,” demanding a reduction in administrative licensing and ratification, which the governments at various levels made some effort to implement. However, the implementation process was far from smooth. In 2003, China’s macro economy began to show symptoms of over-heating, which provided an excuse to some administrative departments to create new licensing and approval barriers in the name of “strengthening macro-economic management.” In 2004, one central government department in charge of long- and medium-term planning granted approval to as many as 800 investment projects, whose sizes were all less than RMB 0.2 million23. Although the 2004 Administrative Licensing Law of the PRC established restrictions on licensing requirements, enforcement of this law was frustrated by strong resistance from the beneficiaries of administrative licensing. Some administrative licensing continued to exist under various new guises and some new licensing barriers were created to take

21 The first volume to deeply analyze Chinese systemic corruption was Fubai: Quanli yu jinqian de jiaohuan (Corruption: Exchange of Money and Power), edited by the Editorial Board of Jingji shehui tizhi bijiao (Beijing: Zhongguo jingji chubanshe, 1989). The book includes ten scholarly articles analyzing corruption during the 1978-88 period. 22 See the “Storm of Auditing Land-Leasing in 2003,” at http://www.china.org.cn/chinese/2003/ Dec/467592.htm.

advantage of the loopholes in the law and its enforcement24. 3.2 Lack of action by the government 3.2.1 Slow progress in the building of rule of law Over the past thirty years, China has experienced an evolution from a traditional to a modern market. As market competition and transactions intensified, the previous institutional arrangements appeared to be increasingly inadequate to underpin the effective functioning of the market. In terms of property rights protection, four constitutional amendments since 1988 have consolidated the legitimacy of the private sector, making it increasingly unlikely for the government to violate the private property rights of citizens. Previous “red hat” enterprises have reemerged as genuine private enterprises through various means, and most collectively owned TVEs have privatized their equity ownership through transformation. However, property rights violations among economic agents have become increasingly serious. First, as more enterprises corporatized to meet the needs of market competition, there were increasingly serious violations of the property rights of the shareholders and minority shareholders by management and controlling shareholders respectively. There have been repeated disclosures of cases in the Chinese securities market whereby controlling shareholders siphon off funds from their listed companies at the expense of minority shareholders. Second, as market competition intensified through market discovery and cost reductions, entrepreneurs began to turn to technological innovation as a way to increase profits, thus exposing them to the issue of intellectual property rights protection. In terms of contract enforcement, during the early stages of the emergence of the market, contracts could be enforced because of the value of the transactions and the reputation of the bilateral or multilateral mechanisms stemming from the shared social network of all the parties. The effectiveness of such mechanisms was weakened, however, as the size of the market expanded, the scope of potential trading partners increased, and transactions became increasingly non-personal. Therefore, breaches of contracts became more serious. Coping with the increasingly complex issues of property rights protection and contract enforcement requires that the government provide a set of institutional arrangements on the basis of the rule of law, which includes, among others, a complete system of legislation, an independent and fair judicial system, as well as a highly effective and timely market regulatory system. However, achievements in China’s public management building have been relatively limited. Although the Chinese government put forward the requirements for “rule by law” and “building a socialist country based on rule of law,” the establishment of a legal foundation for the market economy has faced many obstacles. It is true that the pace of lawmaking has been rapid, with many new laws related to contracts and property rights enacted over the past years, and regulatory agencies have been created, such as the China Securities Regulatory Commission and the Intellectual Property Rights Administration. Nevertheless, the enforcement of laws

has been far from effective, as judicial system reform has encountered strong resistance and the courts have been subjected to party and administrative department intervention when they have attempted to exert independent adjudicatory power. According to the international rule-of-law index issued by the World Bank, Chinaâ&#x20AC;&#x2122;s score has been rather low, and in recent years, it has even declined, from 52.4 in 1998 to 40.6 in 200425. 3.2.2 The incomplete and delayed reform of the financial sector In the early years of the reform, most private enterprises adopted a simple mode of production in the form of domestic workshops, which did not require a large amount of capital, so they were able to meet their financial needs through traditional financing methods. The expansion of their business scope, in particular their entry into some capital-intensive sectors, forced many private enterprises to seek additional capital resources. Thus, a relatively sophisticated financial sector was required. Furthermore, the expansion of the market scale provided more opportunities for entrepreneurs to innovate, which also led to a demand for a more sophisticated financial sector that would be able to supply the needed venture-capital financing. However, China has not yet established a highly efficient financial sector. This has been the result of not only inappropriate actions taken by various levels of government in allocating financial resources, as discussed in the previous sections, but also the result of a lack of government action. First, the government has failed to implement effective measures to broaden the financing channels for enterprises. The scale of bond financing is still rather small, and that of equity financing even smaller, that is, almost nil. Commercial bank loans remain the basic source of enterprise financing. Second, the delayed banking sector reform has resulted in severe problems, including undefined property rights, serious corporate governance deficiencies, and a high proportion of non-performing loans. Only recently has a breakthrough been made in terms of this reform. Finally, the government has not yet established sound rules for listing in the securities market and for the regulatory regime. Due to serious loopholes in the information disclosure requirements of listed companies and in trading regulations, investorsâ&#x20AC;&#x2122; confidence in the stock market has been near bottom in recent years, resulting in a stock market that allocates capital inefficiently. 3.3 The impact of the absence of proper insititutions on the allocation of entrepreneurship and Chinaâ&#x20AC;&#x2122;s economic and social development 3.3.1 Increasingly rampant corruption: from the collusion between officials and businessmen to the trading of government posts In the early 1980s, those who engaged in rent-seeking activities were mainly those who held official power, and the value of their rent-seeking activities was not large. Over the past ten years, however, the further increase in returns to rent-seeking fields not only strengthened the incentives for the most talented people who were already in the rent-seeking sectors, but

23 Jiang Yong (2006). 24 See Zhou Hanhua (2005). 25 See Kaufmann, Kraay, and Mastruzzi (2005).

also attracted some talented entrepreneurs who had formerly engaged in productive activities. The reallocation of some or all of the most talented entrepreneurs in the productive sectors to the rent-seeking sectors inevitably fueled the spread of corruption in recent years. The deepening of the corruption can be seen in the ever-increasing severity of corruption-related cases and the huge number of officials involved. In the financial field, statistics show that between 2001 and 2005, there was a total of fourteen major cases, involving more than 1 billion dollars26. In a recently disclosed case, 4,878 officials in state institutions and SOE managers admitted to having bought shares of private coal mines in 2005, with the total amount of funds reaching as much as 737 million RMB27. The officials had used their power to transfer publicly owned mining resources to private entities or to themselves28, and to protect the mine owners’ illegal mining activities from the law enforcement departments, including the department for production safety. The increasingly serious corruption is further highlighted in the phenomenon of the “buying and selling of government posts.” Because government officials could use their power to directly intervene in resource allocation and therefore gain economic rent, government posts had economic value and became a direct target of rent-seeking. This has been manifested by the increasing practice since the mid-1990s of “buying and selling of government posts” with the intention of obtaining power to allocate resources. Different posts were designated at different prices according to the power of their influence. Officials who held the power of appointment and removal could directly reap gains from these practices. In January 2006, in order to put an end to such practices, the CPC Central Commission for Discipline Inspection publicized the names of six officials involved in the “trading government of posts29”; as a result, one principal in a provincial Organization Department was criminally indicted30. According to research conducted by Transparency International, China’s Corruption Perception Index in 2006 was 3.3, ranking number 70 among countries in the world, thus indicating from a quantitative perspective that corruption is an endemic and chronic illness in China. 3.3.2 The lack of motivation for entrepreneurial innovation directly weakening China’s potential for sustainable economic development In China, the key to the sustainability of economic growth lies in a transition from a growth pattern driven by capital accumulation to a growth pattern driven by innovation and development of the service sector31. However, data from the China Economic Census in 2005 show that on average Chinese industrial enterprises spend only 0.56 percent of their sales revenue on R&D, and most industrial enterprises engage in little indigenous innovative activity32. The data also indicate that the service sector accounts for only 40.7 percent of China’s GDP33, which is not only lower than that of most developed countries and many East Asian countries, but also lower than that of low-income India. That entrepreneurs are not moti-

vated to develop a modern service industry and to engage in technological innovations obviously is a serious obstacle to China’s long-term economic growth that cannot be ignored. Why do Chinese entrepreneurs not perform well in terms of innovation and the service industries? A fundamental reason is that a sound environment that protects property rights, especially IPR, is required for entrepreneurs to engage in technological innovation, and involvement in the services sector requires an institutional environment that is more sound than that required for engagement in the manufacturing sector34. In a less-sound institutional environment, returns to productive activities are lower, discouraging capable people from allocating their talent. As noted above, in the recent ten years, due to the shortcomings of the Chinese government in providing a satisfactory environment for the rule of law, the high transaction costs involved in developing a modern service industry or for engaging in technological innovation have eroded potential benefits for entrepreneurs. Furthermore, against the backdrop of an underdeveloped financial market, there is less funding available for business creation, thus discouraging potential entrepreneurs due to the inadequate returns to the productive use of their talent. 3.3.3 The further widening of income gaps between different social classes Since the reform, income gaps have continually widened in China, which apparently is related to the fact that marketization has linked an individual’s income to the market’s evaluation of his capability, and disparities in capability have resulted in disparities in income. However, even more importantly, due to the range of the expediential institutional arrangements, officials holding allocative power, and those close to them, are able to seize more wealth through rent-seeking. As corruption (mainly rent-seeking) in recent years has been exacerbated by penetrating more power-holding departments, inequalities in opportunities have enlarged the gap between the rich and the poor in Chinese society. Because entrepreneurs have preferred to devote their talents to rent-seeking fields, thereby reducing the momentum for productive activities such as innovation, fortunes have been reaped by a minority at the expense of the disadvantaged groups who have been denied opportunities because of the slow growth of jobs. The joint effects of these factors have resulted in wildly widening income gaps among Chinese citizens. Statistics provided by the World Bank show that the Gini-coefficient in China increased from 0.30 in 1982 to 0.39 in 1988, and further to 0.45 in 2002 (UNDP and China Development Research Foundation, 2005). Other research based on data provided by the National Bureau of Statistics indicates that China’s Gini-coefficient increased from 0.35 in 1988 to 0.42 in 1997, and when tax dodging, tax evasion, corruption, and other forms of illegal income are included, the actual Gini-coefficient increased to 0.49 (Chen Zongsheng and Zhou Yunbo, 2001). The latest estimation by some Chinese economists points to a 28 percent share of rent in GDP (Gao Huiqing et al., 2006). The extremely unequal distribution of rent in large part explains the income

26 Data from Wen Yuanhua (2006). 27 Data from Wu Guanzheng (2006). 28 The Chinese Constitution provides that all mining resources are state-owned property. However, because of the lack of accountability, government officials often have de facto control over the resources. 29 See “Running to Ask for Official Positions: ‘Buying and Selling of Official Positions’ Are Punished Severely in China,” Overseas People’s Daily, January 24, 2006, at http://www. people.com.cn/GB/paper39/16723/1471665. html. 30 See “The Former Director of the Organization Department of Jiangsu Province Party of the CPC Was Sentenced to a Stay of Execution for Bribery,” at http:// politics.people.com.cn/ GB/1026/4058233.html. 31 Wu Jinglian (2006). 32 See Bulletin of Key Data of the First Nationwide Economic Census (No. 2), at http://www. stats.gov.cn/zgjjpc/cgfb/ t20051214_402296016. htm 33 See Bulletin of Key Data of the First Nationwide Economic Census (No. 3), at http://www. stats.gov.cn/zgjjpc/cgfb/ t20051216_402296629. htm. 34 Professor Chen Zhiwu of Yale University has provided convincing arguments on this subject; see Chen Zhiwu (2004).

inequalities in Chinese society. The rapidly widening income gap is a critical source of the intensification of social tensions. 4. Conclusion Entrepreneurial innovation has helped China maintain a high growth rate over the past twenty-six years. But can this trend be maintained? There are obvious risks given the latest moves in the allocation of entrepreneurial talent, as explored above. We maintain that the healthy and sustainable development of the Chinese economy in the future depends on the effects of further reform on both the economic and political fronts, and whether the returns in the productive sectors can be raised in relation to those in the rent-seeking sectors such that more entrepreneurs will be encouraged to allocate their talents and abilities to innovative activities that make the â&#x20AC;&#x153;cakeâ&#x20AC;? bigger. Therefore, the ongoing SOE reform and financial reform must be promoted unremittingly and the fundamental institutions required by a modern market economy need to be further improved so as to establish a market economy based on rule of law. The key to institutional building lies in the repositioning of governmental functions and the reduction of returns to official rent-seeking sectors. Governments at different levels must retreat from areas that should be left for the market to play a fundamental role in resource allocation and instead should redirect their efforts to providing various public goods, especially a healthy and complete legal regime that will protect property rights, level the playing field, and ensure contract enforcement. The repositioning of governmental functions is doubtlessly an extremely difficult task because it requires government departments to carry out a self-revolution. But such institutional building must begin soon if the Chinese economy is to continue to do well in the long term.

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Should we kill the tiger? Since ancient times it’s great to keep faith with the people A word of honour is mightier than the worth of gold Therefore we’d better not slander Lord Shang so much He was the man put through reforms with due reward and punishment

商今一自鞅人言古能未为驱令可重民政非百在必商金信行鞅轻诚

弑虎乎 Fin.

ÂŠ [Corruption], Wade Wu, June 2014. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior permission in writing from publishers. We have attempted to contact all copyright holders. We apologise for any omissions and, if contacted, will amend in future issues. Printed by [The Art Room] PO Box 64211, New Market, Auckland 1164, New Zealand