One of the benefits of the global financial crisis, if we allow ourselves to look for such a token silver linings, is that a number of major flaws and vulnerabilities of the world’s financial and political systems are being exposed for examination. Problems are being laid bare and difficult truths are being unearthed. This thought struck me as I was reading several articles earlier today about the economic slowdown in China, and the potential of a coming crash in one of the world’s most dynamic markets. With economists predicting a steep slide in growth for the third quarter, world markets are shuddering with anticipation of having to deal with declining Chinese demand in everything from steel to professional services. Even though 9% growth is still that most countries can only dream of, this would be the first time in more than five years for Beijing to record single digit growth rates. Corruption is a very big part of the story.
What the coming crash in China (and the crash already in progress in Russia) shows us is that there are certain benefits of economic longevity and resilience in the strength and transparency of institutions – a feature that is notably absent in both economies due to endemic and crippling corruption. David Frum recently hit on this point in the National Post, citing one of my favorite authors, Minxin Pei: “as China got richer, control of the Chinese state had become more valuable. It’s one thing to be a corrupt official in a miserable socialist anthill–much better to be a corrupt official in a thriving cash economy.“Years of so-called “coercive tied selling,” by which business deals in both China and Russia enter into imperfect market conditions involving political arrangements and prolific corruption opportunities, have significantly undermined investor confidence in these markets, leaving banks even reluctant to use bailout funds to loosen credit.An example of tied selling in the Russian context is the connection between foreign involvement in energy ownership with a tie-in to nuclear or arms sales as part of the transaction cost. This type of tied selling in fact, has been institutionally made easier by the new legislation with respect to strategic industries in Russia which leads to this type of cross-sectoral bargaining. One example would be Libya’s curiosity in buying $2 billion in arms from Russia following a series of energy deals.According to Transparency International’s Corruption Perceptions Index for 2008, Russia ranked at 147 while China reported a much higher ranking at 47. But we shouldn’t be confused into believing that both Russia and China experience similar types of corruption at the same levels of government. From my experience, both anecdotal and otherwise, there are few countries that can compare with the extremely high levels of government that institutionalized corruption has reached within the Russian government, as opposed to China, were there is a more prolific brand of corruption entrepreneurs at lower levels of government.Case in point, the party leadership in China is very fond making strong examples of accountability of select high officials suspected of corruption – just ask Beijing’s former vice mayor Liu Zhihua, who has been given a suspended death sentence today for having benefited from construction-related graft in the build up to the Olympics. It has been a very long time since I have heard about any high-level corruption prosecution in Russia – but rather more pedestrian, lower-level bureaucratic firings.No market is immune to the damage caused by this terrible international financial crisis, but the endemic corruption in both Russia and China significantly reduces each state’s ability to proactively take counter-measures in the areas that need fixing. Stay tuned to this blog for more reports in the future taking a deeper look at the corruption dynamic in a comparative context.