Thursday, September 3, 2020

More on bureaucratic incentives and corruption in China and India

I blogged earlier here about Yuen Yuen Ang's analysis of corruption in China and India. I had also blogged here about how President Xi Jinping's anti-corruption drives had created some form of risk-averse survival strategies among bureaucrats. 

In a recent article, she pointed to the paradox of a "corrupt meritocracy",
Corruption and competence do not just coexist within China’s political system; they can be mutually reinforcing. Ji Jianye, the former leader of Nanjing and Yangzhou, in Jiangsu Province is a case in point. Through massive demolition and urban-renewal projects, he rapidly transformed Yangzhou into an award-winning tourist destination, and over the course of his career has earned the nickname “Mayor Bulldozer.” Under his leadership, the city’s GDP surpassed the provincial average for the first time ever. Meanwhile, Ji’s long-time cronies made a fortune during his tenure. In exchange for lavish gifts, bribes, and company shares, Ji awarded their businesses near-monopoly access to government construction and renovation projects. One of these companies, Gold Mantis, saw its profits grow fifteenfold in just six years. The more Ji pushed for growth, the more spoils he produced. This paradox is not limited to Ji. In a forthcoming book, China’s Gilded Age, my study of 331 CPC city-level secretaries’ careers, I find that 40% of those who have fallen to corruption charges were promoted within five years, or even just a few months prior to, their downfall... Yet corruption is more of a feature of the system than a bug. This should come as no surprise. The CPC controls valuable resources – from land and financing to procurement contracts – and individual CPC leaders can and do command immense personal power. Hence, CPC leaders find themselves constantly inundated with requests for favors, many of which are accompanied by graft.
But the other side of corruption is the salient role of competition and performance.
... the symbiotic relationship between corruption and performance in China’s fiercely competitive political system. For political elites whose formal pay is low, cronyism not only finances lavish consumption but also helps advance their careers. Wealthy cronies donate to public works, mobilize business networks to invest in state construction schemes, and help politicians complete their signature projects, which improve both a city’s physical image and the leader’s track record.
See also this article.

Tyler Cowen has a crisp summary of Ang's book,
1. Access money dominates.
More concretely, politicians prosper by getting things built, not by preventing things from getting built.

2. China’s political system operates on a profit-sharing model.

3. Capacity-building reforms have curtailed damaging forms of corruption.

4. Regional competition checks predatory corruption, spurs on developmental efforts, and ratchets up deals.
This is a good podcast on the book. 

There are two aspects of performance that are of relevance. One, performance in the Chinese case is measured in terms of positive contribution to regional economic growth. The metrics used to measure performance were reasonably credible measures of aggregate progress. This is important because there is a difference between cronyism that confers disproportionate privately shared benefits while inflicting significant net long-term social costs and one which shares around both private and social benefits. The later is net welfare enhancing.

The actions of an official who takes initiative and executes a project effectively in time and with good quality or expedites a critical process or proactively eases long-pending constraints on a project are all productivity and welfare enhancing. In contrast, actions which are by way of rent-seeking on statutory permits or licenses, or merely favouring one bidder over another in a tender, or turning a blind eye to a developer compromising on the quality of a project are all productivity and welfare decreasing. The former can be described as 'good' corruption and the latter as 'bad' corruption.

Two, what underpins this performance dynamic in case of China is the institutional incentive system. For the higher officials, positive performance, measured in terms of some aggregate growth, is rewarded with promotions and movement up the Party and government hierarchies. The street level bureaucrats are incentivised with salary increases linked to performance of their agencies or provinces and not insignificant fringe compensation. Then there are the associated rents. These rents act as an attractive efficiency wage to incentivise effort as well as discourage officials from becoming extractive.

An important disciplining factor is the intense competition among officials and party functionaries at all levels, and across provinces. The latter in particular is important since the higher level officials leading the provinces compete with each other to rise up the party and government. This has meant that they have been supportive of the reforms introduced early this decade to constrain theft and predatory practices by lower officials. After all this contained petty and 'bad' corruption and increased their control over their subordinates.

As Joe Studwell has nicely documented, this incentive system also underpinned successful industrial policy among North East Asian economies. The private enterprises which received government benefits had to compete with each other and deliver on export performance. As long as they adhered to this, the system condoned other business practices, including corruption and generation of negative externalities. In short, in China, both development and corruption are competitive.

The formal nature of the performance-promotion relationship is also important. The connection between promotions and performance means that even with the risk of the anti-corruption investigations, there is enough incentive remaining to sustain the symbiotic relationship. Also, officials can mitigate the risk by being part of well-connected patronage networks. In such networks, higher officials act as patrons to lower level officials (clients) - they identify promising clients, cultivate and nurture them, and support their progress up the ladder, thereby creating norms of trust and loyalty.

However, even with the best incentive structure and oversight, in such massive and complex systems there are multiple good and bad equilibriums possible. China's success till date has been in maintaining a balanced equilibrium. For example, the corruption at the provincial and county levels appear not to have tipped over (which could easily happen, even with the best incentive structure) to become aggregate welfare reducing. Or the performance metrics have not been extensively gamed to cover up inefficiencies and corruption. These problems, while doubtless present, appear not to have become the norm. That's some achievement. But how long can it last?

In contrast, in India, there is little symbiotic relationship between corruption and performance. Yes, among some officials (and as a general bureaucratic culture in some states) there is a relationship which is tolerated because they also deliver irrespective of whichever party is in power. It is the classic efficiency wage. And in a system with very few who can actually deliver, such officials command a premium among all parties in power. 

But this is not the case with the vast majority of corrupt officials. Their corruption is of the 'bad' or welfare subtracting kind, largely petty or grand theft without any productive growth enhancing contribution. In fact, a significant portion of the corruption is of the preventing-things-from-getting-done or destructive variant. Besides there is neither any competition nor performance relationship to productively channel such corruption. It also does not hurt anyway to be corrupt. And the occasional efforts to capture performance have been gamed extensively as to lose all credibility.

The highly centralised nature and ubiquitous presence of the government in China, without the clear rule of law restraints that characterise democracies, means that bureaucrats not only have significant power but also the discretion to exercise them. Authoritarian officials can make unilateral decisions and grant exclusive access to privileges and profits. They can make big changes very quickly. They can confer large benefits with the stroke of a pen. So the actions of a high-level provincial bureaucrat can have a significant positive influence on the fortunes of a business. Officials can help businesses move their projects by offering special deals, cheap land, regulatory exemptions, and other perks. These are the access money corruption.

In contrast, in a democracy like India with its rule of law and checks and balances, there are limits to the powers of individual bureaucrats or even politicians. In fact, in most instances, no amount of access money can assure businesses of such preferential privileges. In the Indian context, access money can at best expedite processes, and most often only to get a service within the time that the business is already entitled to. It is often said that officials in India, even at very high levels, can stop a file far more easily that they can move the same file. 

No comments: