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November 30, 2000

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MARCH 3, 2000 VOL. 26 NO. 8

Beating Corruption
The Solution For China Is To Carry Out Political Reform
By ALLEN T. CHENG

During a casual dinner party in a friend's home in Beijing, a young Chinese turned to me and boasted how easy it was for him to make "extra" money as the general manager of a company owned by the Ministry of Education. "In China, everything is owned by the state," he said, sipping after-dinner cognac. "Who will notice if a percent or two of my revenues goes into my pockets? As long as the company is profitable at the end of the year, no one will pay much attention."

The general manager's attitude is typical of many who run state-owned enterprises (SOEs) in China. On paper he earns $200 a month, but he takes home more than $10,000. And who can blame him? He works every bit as hard as his counterparts in foreign companies in China, some of whom earn $100,000 annually, and delivers as much on the bottom line. Why shouldn't he take home the same?

Corruption has never been bigger in China, yet the government - despite numerous anti-graft campaigns - hasn't come close to controlling it. That's because it isn't really attacking the cause of the problem, which has nothing to do with Chinese having bad morals or being "spiritually polluted" by the West. Rather, it's rooted in the dilemmas inherent in a system run by a one-party state that refuses to implement political reforms.

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The Communist Party has been cracking down hard on "corruption." In 1999, it punished 132,447 officials, according to the China Daily. However, it's hard to take the party seriously when its campaigns tend to be politically motivated. While Chen Xitong, ex-mayor of Beijing, was jailed for corruption in 1998, it's clear that he had lost out in a power struggle against President Jiang Zemin. Also clear is that the recent crackdown on smuggling in Xiamen is linked to a leadership struggle [see "Court Intrigue," Feb. 11].

Despite economic reforms, the party refuses to separate itself from the government lest it risk losing control. In addition, SOE reforms are stalled for fears that the restructuring of poorly run companies will lead to layoffs that give rise to social instability. Meanwhile, SOEs must continue to have party ideology committees which, though they are losing influence, still wield power in day-to-day management.

On the other hand, there is explosive growth in the private sector, where wages are high and based on performance. A top local executive working at a foreign company can earn as much as his counterparts in Hong Kong, Taiwan and Singapore. That $100,000-a-year salary looks even better compared to the public sector, where salaries have fallen in real terms since the 1980s. An SOE chief's salary may be less than $300 a month, but he controls budgets that run into the millions. He can't help but be envious of those in the private sector - there is the great temptation.

While wages have continued to be low at SOEs, they are even lower in the government. A senior bureaucrat earning less than $200 a month may control big budgets or have immense power over an entire segment of the economy. Meanwhile, his budget slashed, he has been encouraged to use "market economics" to make up the difference. It's not hard to imagine how he might supplement his department's income - and take a small slice for himself in the process.

A few years back I lunched with a senior official at the People's Supreme Court who was leaving to set up his own law firm in Beijing. I asked if China could mitigate corruption by raising civil servants' salaries 50-fold and establishing an effective anti-corruption unit such as in Hong Kong. "Would $100,000 a year be enough for a bureau chief?" I asked. "No," he said. "Even mid-level department heads are provided with cars, drivers, housing subsidies - all the benefits of an iron rice bowl - plus unlimited control of state funds and the power to extract bribes. Even $100,000 wouldn't be enough."

Fei Ming, the managing director of Sekurit Saint-Gobain Shanghai Co., a French-owned auto glass plant, says the key problem is that SOE managers don't know who their shareholders are. "With me, it's clear I report to my boss in France and he reports to the board," he says. "My job is to enhance shareholders' value. When I do that, I get raises and bonuses." For SOE managers or ministry bosses it's difficult to put a face on their owners - the people, the ministry or the party? When they do well, they may or may not be recognized for it. Without a clear picture, many take the simpler route: siphoning off money.

To defeat corruption, the party must seriously move forward with political reforms. These include: separating itself from the civil service and the People's Liberation Army; instituting rigorous civil-service examinations; turning SOEs into shareholding companies owned and run by their employees. At the same time, China must boost public-sector salaries tremendously while clamping down on corrupt officials. And lastly, it must create a basic social safety net so that the ex-SOEs can lay off people to restructure without causing social or political instability.

The party can achieve all of this step by step and still avoid its greatest nightmare - losing its status as the ruling party. It just needs the political will. For without political reforms, China's economic reforms will ultimately fail.

ALLEN T. CHENG is Asiaweek's Senior Correspondent (Greater China)





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