China's Rise: The New Corruption

The Chinese government is sophisticated and successful. So why does it have so much trouble earning trust?

In China this weekend, we are celebrating the Dragon Boat festival, complete with video footage from sites across The Middle Kingdom of teams of oarsmen racing 10-meter-long boats across choppy river waters.

The holiday commemorates a famous poet who committed suicide in protest against the sovereign's corruption during The Warring States period (278 BCE).

I came to China four years ago, in the flush of national pride surrounding the 2008 Olympics and the ongoing juggernaut of year-over-year 10% GDP growth. (Those reported GDP numbers were, and are, "man-made," according to the incoming premier, but no matter.)

In the meantime, China's mercantilist trade policy has led its export-based economy to the same junction that greeted Japan and South Korea and Taiwan. Those Asian Tigers manipulated their currencies, protected their domestic markets, and subsidized their national-hero-business enterprises as part of a successful strategy to create national wealth.

The trick in doing so, in transitioning from being a developing country to being a developed country (and thus avoiding the middle income trap), is to move up the value curve by making and selling the kinds of highly profitable products (Nissan cars, Samsung mobile devices) that can sustain the country when the low-wage, low-value jobs inevitably depart (as they are now) to The Phillipines or Bangladesh or Vietnam.

This is a topic of intense interest to my MBA students here in China. They understand the pivot that China is trying to make economically, and they likewise understand that to make that pivot successfully, China will need to reform its financial sector, shift its economy to much more reliance on domestic consumption, liberalize its's a long list.

What stands in the way? Well, for one, the polical structure: Those Asian Tigers all have democratic governments.

To say that China needs political reform is no heresy. The country's leaders routinely pronounce this, and the world has a big stake in their success in seeing this through.

(There's another, closely related, consideration, the one around which so many of China's hopes and fears revolve; the one that shapes every aspect of daily life here; the one that I, as a Westerner, could not comprehend until I came here: China's large population. That's a topic for another post.)

China's leaders understand that political power rests, ultimately, on having credibility with the people. And for 30 years, the people have trusted the government to provide ever-rising standards of living. But China's leaders also understand that the greatest threat to their regime is the corrosive influence of corruption.

So, on this Dragon Boat Festival weekend, we return to the issue of corruption. I guess the more things change, the more they stay the same.