Effects of Corruption in Asian States

The power of the state to influence operations and success of businesses is accepted in virtually all policy circles, though traditionally this focus centers on regulatory and tax regimes. Less obvious is the hidden intersection of governance and markets which distorts and subverts both. In Asia, the rapid evolution of markets in many countries over the last century has made government interactions with those markets more uncertain: the lack of durable institutions and legal traditions in the area has created a series of more ad hoc relationships. Corruption and rent-seeking behaviors by bureaucrats is somewhat inevitable in this climate.

What, then, is corruption in this context? For China, Gao argues that

The Chinese government uses various tools or policies to speed up economic growth, to boost exportion of goods and services, to adjust the distribution of incomes, to control price of commodities, and so on. All these activities create rents for businesses. As a result, firms offer bribes to government officials in exchange for the creation and allocation of the rents. (Gao 2011)

These distortions, or “rents”, are opportunities for corporations to capture wealth which then accrue to whichever firms bid most effectively for them, typically in the form of bribes or kickbacks. Rather than being a component of cultural or social norms, though, “rent-seeking and corruption are not just the symptoms of pathological organizations and practices. The root causes go much deeper. They are to a large extent fashioned by the policy and regulatory frameworks which govern industrial planning and set development priorities.” (Ngo 2007) In this context, the inevitability of such behaviors seems less damning.
If that is the case, legal strategies and policy changes should prove effective in reducing the scope and effects of rent-seeking behavior. Gao, however, is pessimistic: “legal enforcement in China is interfered with the high-rank officials severely. The reality is, some officials have super power in deciding if a law is to be followed and how much. Therefore, the legal system and legal enforcement are less useful than a person’s political rank and his/her social status in fighting bribery or corruption.” (Gao 2011) This pragmatic truth runs counter to the stated goals of the state, making the question of resolving corruption a difficult one. It becomes something of a tragedy of the commons, where individual bureaucrats are incentivized to take bribes and the state as a whole benefits from a legal and transparent business climate.

As the Chinese government has been constantly encouraging the formation of joint ventures between foreign firms and indigenous Chinese firms in the hope that it will accelerate potential knowledge spillovers from FDI, our study suggests that reducing the prevailing corruption will help the government to attain its purpose. Although the huge consumer base has helped China in inducing MNEs to establish joint ventures so far, an improvement in the country-wide institutional environment would no doubt provide more confidence for MNEs to consider whether to set up more joint ventures in China. (Duanmu 2011)

International corporations are entirely cognizant of the risks of extortion in relocating to or expanding in developing Asian nations and states must make efforts to address those concerns to drive legal growth. Absent such attempts, business looks much less secure.
The benefits to government officials in an individual sense are most obvious, but less clear are the costs to firms forced to participate in such environments. While firms which successfully bid on available rents must factor in the costs of such bribes, the firms which fail are even worse off.

With the allocation of economic resources (e.g., licensing, fiscal subsidies, tax benefits, low-cost land, and waivers of enterprise liabilities) at their discretion, local governments can either grant preferential treatment to businesses or impose extra fees and fines on them. In addition to suffering from the low priority accorded them in government economic policies, non-state-owned companies are often subject to unfavorable tax rules, pay higher prices to obtain resources, and are more likely to be the target of discretionary fees and charges imposed by local governments. The various discretionary charges imposed on companies often constitute a significant proportion of their total operating expenses. (Chen, et al. 2011)

The potential for negative incentives imposed on firms to promote further coercive behavior and subsequent firm compliance is very real. In many of these states, not paying bribes is simply a losing game. There may be few, if any options for viable business operations absent such payments. This is especially true in the case of sectors which interact most directly with governments: “Another method of procurement widely practiced in the region is direct purchasing/contracting, in which there is little or no competition. In the Philippines, this is referred to as ‘negotiated procurement’ and in Vietnam and Indonesia as procurement through ‘direct appointment’. Direct contracting involves earmarking one company for a procurement and then negotiating the price and the terms of the contract. This mode of procurement is the most likely to be associated with corruption.” (Jones 2009) Government contracts with firms are ideal opportunities for graft and embezzlement, and the predictable result is often borne out.

Companies in the powerful Indonesian Builders Association (GAPENSI) with close connections to government leaders often win large public infrastructure contracts (World Bank [WB], 2003: 32, 33). Up until 2004 in Malaysia, a small network of contractors known as Project Management Consultants, with crony links with Malaysian senior officials and government leaders, won a high number of profitable government contracts for civil engineering consultancies without a competitive tender (Siraj and Sunita, 2006: 201). (Jones 2009)

Without clear public oversight mechanisms, such methods of government profiteering are unchecked, and enrich corporations while impoverishing the societies which should rightly benefit from such contracts.
The pervasiveness of such processes in the region makes it seem somewhat inevitable. Why should this be true? The history of post-Cold War development in Eurasia is one of extreme and rapid market liberalization, organized under the framework commonly titled the Washington Consensus. This flash integration into global markets created wealth overnight, but also opportunities and weak institutions: “It is seen that economic shock therapy has lead to corruption in the region along with the undeveloped economies in Central Asia. Countries in the region transformed their central planning economic system to a free market system in a very short period under the leadership of Washington-based Institutions.” (Sözen, Sari and Çelik 2011). Moreover, Huang and Snell (2003) argue that, “corruption may be triggered by the discontent of self-perceived victims of material inequity (Crosby, 1982; Crosby and Gonzalez-Intal, 1984; Martin, 1984, p. 97). China is a high power distance society, yet salaries of government cadres and SOE leaders are much lower than those of comparable private entrepreneurs, and less than four times those of the lowest level subordinates, even in Southern provinces (He, 1998; Li, 1996).” If the disparities between existent government “firms” operating under a nominal command economy and newly introduced international firms are too obvious, participants in the former will study ways to bridge the gap. This has proven to be especially true in China, as the ineffectiveness of many state owned enterprises in the face of international competition has made the government-backed firms less operationally sound.

In particular, government control may lead to bloated management structure and excessive managerial expenses. With China’s deepening economic reform including the development of input market and the protection of private properties, such costs of government control are expected to outweigh the benefits of government control, which may then explain the decline of collectively-owned enterprises in more recent years (Che, 2003). (Lu, Tao and Yang 2010).

The combination of external pressures and internal discontent has forced a dramatic rewriting of how economic planning is done in many Asian nations, accelerating the process of economic integration, even in states which had robust strategies to combat such outcomes.
This has created something of a paradox in Asian development: the very systems and institutions which are in the West antithetical to corrupt behaviors subtly incentivize them throughout Asia. While there are compelling arguments for long-term immersion in such frameworks reducing the scale and costs of coercive behaviors, and there are obvious success stories in the region like Singapore, the short and medium term looks less than promising on this front. Even the best efforts are undermined by adverse incentives, and firms continue to play a self-destructive game which also saps billions annually from state coffers. The feasibility of development is constrained in such a climate, and likely will be for the foreseeable future.

Works Cited
Chen, Charles, Zengquan Li, Xijia Su, and Zheng Sun. “Rent-seeking incentives, corporate political connections, and the control structure of private firms.” Journal of Corporate Finance, 2011: 229-243.
Duanmu, Jing-Lin. “The effect of corruption distance and market orientation on the ownership choice of MNE’s: Evidence from China.” Journal of International Management, 2011: 162-174.
Gao, Yongqiang. “Government Intervention, Perceived Benefit, and Bribery of Firms in Transitional China.” Journal of Business Ethics, 2011: 175-184.
Huang, Linfen Jennifer, and Robin Stanley Snell. “Turnaround, Corruption and Mediocrity: Leadership and Governance in Three State Owned Enterprises in Mainland China.” Journal of Business Ethics, 2003: 111-124.
Jones, David. “Curbing Corruption in Government Procurement in South East Asia: Challenges and Constraints.” Asian Journal of Political Science, 2009: 145-172.
Lu, Jiangyong, Zhigang Tao, and Zhi Yang. “The costs and benefits of government control: Evidence from China’s collectively owned enterprises.” China Economic Review, 2010: 282-292.
Ngo, Tak-Wing. “Rent-seeking and economic governance in the structural nexus of Corruption in China.” Crime, Law, and Social Change, 2007: 27-44.
Sözen, İlyas, Selahattin Sari, and Ahmet Alkan Çelik. “Corruption and Economic Freedom in Central Asian Republics (2001-2008).” Chinese Business Review, 2011: 693-700.


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