Growth Despite Corruption

Growth Despite Corruption: Lessons from the US and China 

The Gilded Age in America in the 19th century shares many similarities with present-day China. Both countries share a dramatic story of economic growth despite vast corruption. But beneath the veneer of the economic boom, many problems festered, among them rising inequality and financial risk. 

Aspen Initiative Africa held a webinar to explore the relationship between growth and corruption, drawing lessons from the US and China.

On the panel was Dr Yuen Yuen Ang, Alfred Chandler Chair of Political Economy at Johns Hopkins University and author of How China Escaped the Poverty Trap and China’s Gilded Age and Olusoji Apampa, Co-founder and CEO at the Integrity Organisation. The webinar was moderated by Aspen Initiative Africa’s Founder Dr Laila Macharia.

Dr Ang presented a framework for unbundling corruption, demonstrating how corruption plays out in various forms. We were also inspired by Nigeria’s progress in port reform as Apampa shared how the Integrity Organization is unbundling corruption in Nigeria to enhance the effectiveness of its anti-corruption efforts. 

Read on for a breakdown of the conversation on what Africa can glean from the growth trajectories observed in China and the US.

A Tale About an American Industrialist

Mr Fu won a fabulous deal stuffing suitcases with company shares. He lavished bribes upon influential officials in exchange for subsidising his railway projects with cheap loans and land grants. The policymakers in charge of infrastructure and budgets were not only Mr Fu’s buddies but also his indirect business associates. Their family members ran businesses in the steel industry which would benefit from a construction boom. As ties between capitalists and politicians grew closer, the deals got better. The government doubled land grants and loans to Mr Fu while turning a blind eye to his inflated costs and risk of losses.

When confronted with a tale like Mr. Fu’s, our initial inclination is to associate it with China and its numerous corruption scandals. However, there’s a surprising twist – Mr. Fu is not Chinese; he is American. In Chinese, he is a Mr Leland Stanford whose last name translates into Sītǎnfú dàxué. 

He is a corporate titan who made a great fortune from building railways during the 19th Century in the United States, with the great wealth that he amassed he became a philanthropist and founded a university at the height of what is now known as America’s Gilded Age – Stanford University.

The Gilded Age is Perfect Imagery

Today, when we consider the United States as the world’s superpower in terms of wealth, military might, and soft power, our immediate association is with the nation as a symbol of good governance, transparency, and democracy.

The U.S., alongside numerous Western liberal democracies, is often regarded as the standard for effective governance that developing countries should aspire to emulate.

In telling the story of Mr Fu, we must remind ourselves of the historical realities – the Gilded Age was actually a time of crony capitalism and there were also years of extraordinary growth and transformation. 

The term ‘gilded’ therefore, serves as a powerful visual reminder of the quality of growth. Gilded is not the same as gold, beneath the appearance of gold, right inside is actually just dark, base metal.

Is It Possible to Have Unequal, Risky Growth Despite Corruption?

Understanding the quality of growth requires that we examine the quality of corruption. A significant challenge in our discourse and understanding of development lies in the lack of qualification for both growth and corruption.

We make these sweeping correlation statements such as “corruption is good for growth” and “corruption is bad for growth”. The rich historical experiences in China and the US teach us, above all, that we must recognize the existence of different forms of growth.

When we examine China and the US, both being superpowers, the prevalent narrative about China is, of course, marked by stupendous and spectacular GDP growth.

However, China’s growth has been accompanied by significant inequality. By 2012, when President Xi Jinping assumed the role of the paramount leader, China’s inequality had surpassed that of the US.

A Tale of 2 Super Powers

In China, inequality is not solely based on class but is also deeply rooted in structural disparities, including rural-urban and regional inequalities. 

Additionally, the country grapples with widespread endemic corruption, distinguished by its distinctive characteristics. The corruption types that we see in China are not petty bribery and extortion, the kind of problems that one may encounter say in the streets of Lagos. In China, you find access money — corruption that entails elite exchanges of power and wealth.

News reports indicate that China is grappling with financial risks from real estate meltdowns to concerns about local governments having excessive debt. Yet a glance at US history reveals that none of these issues are far from unprecedented. In 2008, a financial crisis was triggered in the US by the identical form of corruption that exists in China today. The term “gilded” rather than “golden” is used because this era witnessed growth, and transformation, alongside corruption, inequality, and financial bubbles.

By contextualizing the nature of growth in these two superpowers, the global south can steer clear of becoming infatuated with “success,” wealth, and power. They can maintain a clear perspective, recognizing that the outcome is ultimately mixed, especially when understanding the historical evolution of these two superpowers.

How Can We Think of Corruption in a More Sophisticated Way?

We frequently perceive corruption as a one-dimensional problem, and this perspective is deeply ingrained in our thinking due to conventional concepts, theories, and metrics predominantly originating from the West.

The Corruption Perception Index (CPI) released every year is a great example. Extremely influential and quoted in the media by policy and business leaders, the CPI is taken as a kind of universal, god-given truth.

The CPI assigns a singular corruption score to each country. Upon examining the rankings, it’s not surprising to find that the top 10 cleanest countries are mostly concentrated in the geographically connected OECD Western countries, with a few Asian countries. In contrast, the most corrupt nations are consistently found in the global south. 

Numerous African countries are positioned at the bottom. Thus, when examining these scores, the conveyed message is that corruption is a challenge confined to economically disadvantaged nations.

Unbundling corruption into different types reveals that the distinction between a country like Nigeria and the UK, for instance, is not simply that the UK is devoid of corruption and Nigeria has an abundance of corruption.

The difference lies in the UK having legal and sophisticated forms of corruption, whereas Nigeria experiences visible, growth-damaging types.

No Corruption is Ever Good

Corruption can be found on a scale of four categories: petty theft, grand theft, speed money, and access money.  

While the first three types impede growth, access money (elite exchanges of power and profit) operates in a dual manner: it fosters investment and growth while simultaneously posing significant risks to the economy and the political system. 

Like steroids, access money comes with serious side effects.

How Nigeria is Unbundling Corruption

Since 1995, the Integrity Organization in Nigeria has collaborated with the Nigeria Stock Exchange to counteract corruption. 

Following the global financial crisis, they jointly devised the Corporate Governance Rating System with the Nigeria Stock Exchange to restore investor confidence. This initiative has contributed to fortifying the outlook of Nigerian ports from 2010 to the present day.

They sought new ways to improve conditions in the maritime sector, despite lacking the authority to hire or terminate staff. An accountability mechanism, featuring clear rules and regulations and an empowered ombudsman, enabled individuals to combat corruption. Additionally, an online help desk was introduced, offering real-time tracking and notifications.

Since obtaining government support to implement systems, incidents have decreased from 266 in 2019 to 128 in 2020, 84 in 2021, 50 in 2022, and 35 in 2023. Most issues are resolved within 2 – 4 hours, down from 9. Consequently, global shipping costs have declined from $150,000 to $20,000 since 2019. 

Anti-corruption agencies in Nigeria study the politics to better align their work. They unbundle people into personas to garner their support, recognizing that some actors adhere to principles, others are rebels, and in between are opportunists, moralists, and survivalists who play crucial roles in decision-making.

From a Corrupt Era to Better Governance

Pro-Growth Leadership

China and the US experienced an upward trajectory, facilitating anti-corruption and institutional reforms. This progress was supported by an enabling environment fostered by prudent leadership that prioritized pro-growth policies.

When Xi Jinping took over, he initiated engagement with the US, opened markets, and unified the country with a shared goal of national development. By addressing these key aspects, he instilled a sense of hope, subsequently altering people’s expectations, aspirations, and incentives, thereby facilitating institutional reform.

A Pre-Condition for Growth

African countries aspiring to achieve better governance must initially eliminate growth-damaging forms of corruption, such as petty bribery, embezzlement, and extortion.

While China and the US contend with endemic access money—lobbying in the US and large-scale graft in China—Africa faces different challenges. Therefore, discussions about national growth must go hand in hand with anti-corruption efforts, and vice versa.

Using What You Have

China’s local bureaucrats and entrepreneurs employed indigenous practices and resources in unconventional and creative ways to stimulate entrepreneurial activities. This approach resulted in the most inclusive forms of growth, where people had a sense of ownership, contributing ideas, methods, and the development of entire industries themselves.

In the global south, markets are emerging despite challenging conditions. National leaders should adopt a bottom-up approach by identifying successful entrepreneurs and scaling up their businesses. Additionally, they should collaborate with anti-corruption agencies and stakeholders to create an enabling environment for economic growth.

Most importantly, economic growth begins with leadership. Leaders dedicated to the city’s prosperity, with an understanding of how various forms of corruption impede economic growth, will be at the forefront of addressing these challenges.

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