CAMBRIDGE, England — The past few weeks have been sad ones for the supporters of the still young democratic process in South Korea. It has been alleged that a web of corruption surrounds the presidency of Kim Dae Jung, winner of the 2001 Nobel Peace Prize. While no one has, yet, suggested that the president himself is guilty of corruption, the accusing finger has been pointed at his three sons, his wife and his private Asia Peace Foundation think tank. It is the usual story: The allegations are of influence peddling and abuses of power.
Meanwhile, in Japan, hardly a week goes by without some senior politician being accused of, or found guilty of, corruption. The political system itself seems corrupt. After Foreign Minister Makiko Tanaka started to address corruption in her ministry, she was fired in late January. The fact that the construction industry in Japan accounts for a larger share of the gross domestic product than in any other country in the Organization of Economic Cooperation and Development is often put down to corrupt links between politicians, bureaucrats and construction contractors.
In China, a constant flow of high-profile corruption cases, sometimes seems to involve the whole governments of some cities, such as Xiamen and Shantou. The respected Bank of China is currently facing up to corruption among some of its branch managers, in China and abroad, who have defrauded the bank of hundreds of millions of U.S. dollars. The government is currently congratulating itself over a reduction of capital flight from an average of almost $20 billion a year over the period 1977 to 1999 to “only” $5 billion last year. Even that lower figure far exceeds the contributions to China from taxpayers in OECD countries in the form of aid.
Many economists thought that the Asian financial crisis of 1997 was largely the result of a “crony capitalism” that had corrupted the financial sectors of East Asian countries. The unwillingness, or inability, of these countries to tackle head-on the corruption that destroyed the integrity of their financial sectors means that there continue to be financial crises almost on a daily basis. Major systemic meltdowns are still possible outcomes in several countries.
In the 1990s it was common to attribute the “Asian Miracle” of sustained high levels of GDP growth to the “Asian Way” of doing business. This Asian Way involved basing decisions on the allocation of capital and other resources on personal connections, “guanxi” in Chinese, rather than on market forces. This ensured that the large tax revenues that the high growth rates resulted in and the large inflows of foreign capital attracted by those same growth rates were spent on unproductive investments, real estate speculation and obscenely ostentatious lifestyles. It goes on.
I once heard a well-known Chinese economist describe East Asian-style corruption as market-supporting corruption. Although his testimony might be considered tainted by his being a Taiwanese defector who, besides working as an academic, is, or was until recently, a high-level officer in the intelligence service of the People’s Liberation Army, he was making a serious point. His argument is that in East Asian countries, where lots of restrictive regulations apply, corruption takes the form of entrepreneurs bribing officials to loosen the impact of those regulations. In other words, a market outcome is achieved — albeit by the exchange of banknote-stuffed envelopes rather than by the anonymous working of Adam Smith’s “invisible hand.”
Corrupt entrepreneurs do not bribe politicians and bureaucrats to remove regulations and licensing restrictions. Instead, they seek to capture the economic rents that those regulations and licensing restrictions generate. They need the profits to pay the bribes. So crony capitalism is not market supporting, it is market destroying.
It also corrupts the economic system. The people who would be the successful entrepreneurs in a market system become disillusioned when they see resources flowing to the best-connected rather than the most efficient enterprises. They then either go with the flow (“if you can’t beat them join them”), or opt out of the business world altogether with the consequential loss of their talents. They are unlikely to try to bring about reforms through open criticism, for they are aware of the usual treatment afforded whistleblowers in East Asian societies. Tanaka’s treatment was not unique.
Is there any hope for improved governance? I am fairly pessimistic myself. I do not see much likelihood of the degree of corruption being reduced in East Asia in the near future. It is too deeply entrenched. The independence of the judiciary and police are not yet sufficiently well established. In Seoul, a leading policeman thought to have possibly been a crucial witness for the prosecution if the current case goes to court, was “sent” on a world tour after it became public and has “disappeared” in the United States.
When Jiang Zemin became secretary general of the Communist Party of China and president of the Peoples’ Republic, he issued a statement to the effect that the families of leaders should not engage in business activities. Reformers and outsiders lauded this at the time. It had no effect whatsoever. Jiang’s own son is now one of China’s leading businessmen with a very high profile in both the state and private sectors. This is not to say that he is, or ever was, engaged in corrupt practices, but when Jiang issued that statement, he was aware of the temptations that face such people when they or their contacts try to benefit from their connections.
Corruption can never be eliminated. The temptation to benefit from connections will always be there. Some of us regard the U.S. lobby system, which is increasingly found in Europe, and pork-barrel politics, as a corruption of governance. Every year auditors in Brussels report they have uncovered massive corruption-based fraud in operations managed by the Commission of the European Community. Nothing much happens in response to these reports. The share of GDP accounted for by corruption is probably much lower than it is in East Asia and, therefore, the economies are much less prone to systemic collapse.
It represents progress of some sort that the family of the South Korean president is under investigation for corruption and that politicians are regularly being disgraced and forced to resign in Japan.
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