Friday, August 19, 2011

Corruption stifles genuine entrepreneurship - Victor Shih

victor shihVictor Shih
Political scientist Victor Shih looks in The Financial Times into the trial of government officials after the Shanghai fire, costing 58 lives last November. “A disturbing pattern of corruption, which is endangering the lives of millions around China.”
According to details released by the Chinese media, the Jing’an government invited bids for a project to insulate a teachers’ dormitory. Not surprisingly, a company wholly owned by the Jing’an District Government, the Jing’an Construction Company, “won” the bid, but then gave the Rmb30m project to its wholly owned subsidiary Jiayi Company, which had little experience in this kind of project.
After paying government officials bribes to obtain this contract, Jiayi proceeded to farm out various aspects of this project to sub-contractors who paid Jiayi management the highest bribes.
In some cases, the work was further sub-contracted to foremen, who also had to pay sub-contractors bribes. At every level, guanxi and the amount of bribes determined who received the contract, not quality, safety or track record. In the end, a welder, hired precisely because he was inexperienced and therefore cheap, accidentally dropped his torch, which set off the fire.
 His conclusions:
At minimum, two major reform needs to be carried out to reverse the corruption. First, the state economy continues to be sprawling and continues to enjoy soft-budget loans from the banks. This creates ample opportunities for connected insiders to set up dummy companies to take advantage of government contracts. Because senior managers of SOEs are not remunerated according to profit (and profit not tied to capability), they are only weakly incentivised to maximise profit but strongly incentivised to take advantage of rent-seeking opportunities, which allow them to privatise state wealth.
If large SOEs, including state banks, were genuinely privatised, owners of firms would be more interested in generating profit and even building the reputation for their own firms, instead of taking advantage of rent-seeking opportunities.
Of course, China’s weak regulatory environment is also to be blamed. With more transparent public oversight, a free media, and accountable officials, the tragedy in Shanghai could also have been avoided.
Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.
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