China,Economy,Government,Politics | May 31, 2015 Written by Jenny Li Jie.For the past two and a half years, China’s unprecedented high profile anti-corruption campaign under President Xi Jinping’s leadership has drawn worldwide attention. Domestically, Xi enjoys strong support from the general public, who have harboured deep resentment against those “tigers” and “flies” whose embezzlement and bribery have done enormous damage to social justice as well as the public interest. Meanwhile, there have been debates, scepticism and even criticism from various sectors of society. Some argue that this campaign is disproportionately aimed at Xi’s alleged rivals and opponents and has been used to help Xi consolidate power. Others have worried that the massive anti-corruption campaign may lead to economic stagnation. Such concerns seem to be supported by the macroeconomic data, which shows a significant slowdown in the Chinese economy in recent years. The Chinese economy has entered a new era, with an expected (even planned) decrease in the GDP growth rate, that is framed by the Chinese media as the “New Normal”. What is more, as predicted by the World Bank, the Chinese economy will probably endure a further downturn, with less than 7 percent in GDP growth in 2017 (see chart). Obviously, the year 2012, when President Xi came to power, was a watershed in terms of economic growth. In 2000-2012, the Chinese economy maintained an average annual growth rate of 10.2 percent despite the financial tsunami in 2008. From 2012 onward, however, there has been a significant dip, especially in the high-end service industry and its supportive segments. This, as some pointed out, coincides with the massive anti-corruption campaign which was launched in that year. (Source: World Bank database)This argument may sound reasonable. Certain empirical studies show that “corruption” could serve as “lubricant” of economic development, especially when the legal system lags behind economic development driven by market forces. Thus, businessmen have to use bribery, or “speedy money”, to bypass redundant administrative procedures and gain “fast pass” privileges from officials in charge. With this “fast pass”, those who bribe can expand their business without impediment. which helps to boost the growth. Following this logic, it is not difficult to see why some pundits argue that the anti-corruption campaign has caused the economic slowdown in China.Indeed, as China is undergoing a socio-political transition, during which the institutional construction of the legal system is still in progress, certain setbacks in economic development in the wake of an anti-corruption campaign is inevitable. After all, corruption has created a market for luxury services such as extravagant hotels, high-end resorts and restaurants that are frequented in the name of hosting conferences, attracting investment, and providing public goods. These industries have taken a heavy hit from the anti-corruption campaign. The industries which support such services, such as catering and luxury gifts have also suffered as a result of the domino effect. All of these factors have surely contributed to the economic slowdown.Nevertheless, the economic slowdown should by no means be a “new normal” if the efforts to restructure the economy and the reforms in eco-political institutions are carried out at the same time. A number of studies indicate that the contribution of corruption to growth only takes effect in countries/regions with poor governance, ineffective legal institutions and underdeveloped judicial systems. On the contrary, corruption substantially undermines economic growth in countries with effective legal institutions under the rule of law. Singapore, with its zero tolerance towards corruption, is a good example. In the 1970s and 1980s, while many Southeast Asian and Latin American countries fell into the “middle income trap” because of corrupt governments, Singapore successfully elevated its economy to the first world — A clean and efficient business environment created by the non-corrupt Singapore government was the linchpin in this success.It must be emphasized that the anti-corruption campaign in China is not just a political movement, but an indispensable step for “deepening economic reform” for the years to come. After all, an essential aim of the anti-corruption campaign is to overthrow the economic monopoly established during the past three decades of fast development and the lagging of political and legal institution building. China is not the only country to faced the bottleneck of monopoly during development. In the late 19th and early 20th century, the United States also experienced a relentless struggle to crack down on the monopolies accumulated by business moguls in oil, mining and tobacco industries, as they substantially impeded economic growth at the time. The Anti-Trust Law was born out of this fierce struggle, providing the United States a healthy business environment to prosper for another century.Nowadays, China is standing at a similar crossroads. For decades, Chinese privileged interest groups have plundered uncountable natural and administrative resources at prices distorted in their favour. As a result, these privileged interest groups have formed a high degree of monopoly over resources and markets at the expenses of the public interest and social justice. According to economic theory, a distorted market simply cannot optimize social welfare. Only those privileged ones, consisting of corrupt government officials who take bribes, rotten businessmen who make a windfall through monopolies as well as their family members and associates, benefit from this system. The general public is deprived of not only their deserved share of resources and wealth, but also the basic socio-economic justice that is the very basis of the society. Thus, it is not surprising to see, in a corrupt environment, the lack of public trust in government, selfishness and indifference in social behaviour, and widespread resentment and grievance in the society. Only by breaking through the monopoly by the privileged interest groups can China truly establish an effective market mechanism under the rule of law, which will eventually benefit the economy in the long run.Since the policy of reform and opening was adopted over 30 years ago, the Chinese economy has been running faster while the political reform has lagged behind. As Xi and his colleagues have repeatedly emphasized, anti-corruption efforts can only be sustained by building up effective legal institutions under the rule of law. It is noteworthy that the anti-corruption under Xi’s leadership is not just a campaign-oriented political movement. A series of reform initiatives have been carried out with the emphasis on the rule of law, such as streamlining the administration, decentralization of the approval process, and transformation of government functions for more accountable and effective governance. All these well-conceived policies will promote a healthy business environment where fair competition under market mechanisms will motivate ordinary people’s active participation and stimulate enterprises’ growth potential. This will lead to a more balanced and healthy economic development in the long term.Jenny Li Jie is a research assistant at the Centre on Asia and Globalization, Lee Kuan Yew School of Public Policy, National University of Singapore. Image Credit: CC by Sean_Marshall /Flickr. An Alternative Solution to Corruption Control in China: To Raise Xi Jinping’s Salary? Anti-Corruption: Can shock therapy sustain party’s leadership?