China and us

Political scientist Yuen Yuen Ang, from Michigan University, has written two books that analyze the incredible economic growth of China in the recent decades, and relate it to two phenomena that in theory have played a role in the economic development of rich countries: institutions and corruption. In doing so, she demolishes the conventional wisdom of mainstream political economy.

In “How China Escaped the Poverty Trap,” she shows that the institutions that facilitated the expansion of markets and economic prosperity in China after Deng’s reforms had nothing to do with the high quality institutions that are supposed to facilitate economic growth in mainstream political economy (an impersonal and specialized administration, secure property rights, etc.). China’s rulers gave a high degree of freedom to non specialized and not impersonal officials at all levels, in a climate of confusing property rights.

Acemoglu and Robinson in “Why Nations Fail” claimed that China is an anomaly that should soon collapse because it lacks “inclusive” institutions. However, more than ten years after they wrote their book, China refuses to collapse –or to adopt inclusive institutions. If anything, secure property rights and a neutral administration may be useful to preserve markets, but not necessarily to create them, according to Ang.

She proposes an evolutionary interpretation of history, where causality does not only run in one linear direction, but in multidimensional non-linear feedbacks among several domains, such as state and market. If one applies this approach not only to China, but also to Europe and the US, one can see that their economic takeoff was not preceded at all by the type of institutions that the international organizations try to promote for developing countries nowadays.

In “China’s Gilded Age,” Ang focuses on one aspect of institutional quality, namely corruption. In doing that, she criticizes the use of unbundled measures of corruption, such as the Corruption Perception Index (CPI) of Transparency Internacional. She argues that such an unbundled index gives a misleading perception of a multidimensional phenomenon.

She proposes four types of corruption mechanisms along two dimensions. One dimension reflects whether corruption affects elites or non-elites. And the other reflects whether corruption involves theft or exchange. Combining the two dimensions results into four types of corruption, which can be further decomposed. It turns out that when corruption involves exchanges among the elites, we obtain what she calls “Access money,” a sophisticated set of corrupt deals that may even be legal. This could be regulatory capture, revolving doors, or similar deals, and has a lower negative effect on economic growth than the other, less sophisticated and more harmful, types of corruption. Of more concern is the effect of Access money on inequality.

Today’s growth in China is compatible with corruption, as the growth of the US after the Civil War in the XIXth century was compatible with corruption, and today’s economic power of the US is compatible with large scale, sophisticated access money.

What can be done? Ang suggests that, consistently with her multifaceted perspective on corruption, one-size-fits-all solutions will not work. Rather, remedies must be adapted to local context, must be incentive compatible (you should not ask officials something that goes against their incentives), and must combine a top-down approach with a bottom-up approach where civil society can make a positive contribution.

What seems clear is that “the rise of capitalism is accompanied not by the eradication of corruption, but rather by the evolution of the quality of corruption from thuggery and theft to influence peddling.”