China: July 17, 2001



The Chinese economy is drowning in its own corruption. The Communist Party is itself corrupt and unable to deal with corruption. Fraud, product piracy, consumer rip-offs, refusal to pay debts, evasion of taxes, bribery, and extortion are more common than honest business dealings. Foreigners are unwilling to pay in advance for products or invest in Chinese companies. This, combined with the "skimming" of wealth from every level of business, is starting to seriously slow economic growth. Every few months, another government official announces a crackdown on "economic disorder", a few high profile political opponents are jailed, and the problem never really gets any better. Western companies are caught in a crossfire. If they stay out of China, they lose the chance at the huge market. But if they get into business in China, profits are often destroyed by corruption. Microsoft admits that it loses money on every sale in China because it must keep its prices low so that pirates do not simply make copies. China ranks last (among 35 countries regarded as the most important targets for Western investment) on the basis of what problems foreign companies face. Some recent revelations:

@ Of the four billion contracts signed in China, 50% are fraudulent in some aspect.

@ Corruption is consuming about 15% of the Gross Domestic Product.

@ In the private economy, 50% of taxes are never paid.

@ Of all products made in China, 40% are counterfeit and/or substandard.

@ The accounting records of 2/3 of the largest state firms are fraudulent.

@ The underground economy is equal to 20-40% of the Gross Domestic Product.

@ On any given building project, 15-20% of the cost will be lost to bribery, fraud, or poor-quality work.

The rampant corruption is a result of China's decision to enact economic reform without political reform. There is no independence judiciary to prosecute corruption, no free press to embarrass guilty officials, no opposition party or free election to "throw the rascals out", and no independent trade associations to clamor for action. The collapse of communist ideology without its replacement by any other moral or ethical system leaves people feeling that cheating is a righteous and common act. The Cultural Revolution left the Chinese people unable to trust each other.--Stephen V Cole


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