How corruption fuels inequality in China

After Chinese President Xi Jinping came to power in 2012, his government launched a massive anti-corruption campaign that attracted global attention for its scale and determination. Influential figures long considered untouchable were convicted of bribery or embezzlement and imprisoned. The sanctions initially gave some commentators the impression that Xi might use the initiative to marginalize or persecute his political opponents. But the effort to root out corruption has gone far beyond personal power politics. Led by the Central Commission for Discipline Inspection, an organ of the Chinese Communist Party, it is the largest anti-corruption campaign in world history. As of May 2021, nearly a decade after the campaign began, the CCDI had investigated a total of more than four million people in the government and CCP apparatus, and convicted 3.7 million.

Public investigations and prosecutions of corruption on such a scale have taken place against a backdrop of rising inequality in China. This is no mere coincidence. Inequality in China, particularly in cities, soared after the reforms of the 1980s and then increased further after the privatization and restructuring of many state-owned enterprises in the early 1990s. Rising productivity and wages in high-tech sectors and the growing share of capital income have fueled urban inequality from the top; at the lower end of the urban income scale, the influx of rural workers—many of whom lack urban residency permits and accept low wages—has fueled inequality from the bottom.

As wealth has risen in the Chinese economy, corruption has increased in recent decades. But until now, no one has empirically studied the characteristics of the people the CCDI has found guilty of corruption or attempted to empirically establish the extent to which corruption has contributed to inequality. As it turns out, a detailed analysis of the CCDI data reveals a pattern: not only was corruption among those at the top of the Communist Party’s bureaucratic and technocratic hierarchy very high (in terms of average amounts of money embezzled); it also contributed significantly to inequality, by entrenching the already wealthy in an even more impregnable upper class.

DON TIGER

Thanks to the centralized nature of the anti-corruption campaign and the Chinese government’s publication and systematization of relevant data, researchers can now assess the dynamics. Using data compiled from individual conviction cases, we constructed a database of senior Chinese officials convicted of corruption between 2012 and 2021. The dataset includes detailed information on 828 criminal corruption cases and 686 convicted individuals (some individuals were charged and convicted of more than one crime). They are all CCP members, high-ranking government or party officials, or managers of state-owned enterprises; in the language of the anti-corruption campaign, they are the tigers guilty of the most significant crimes, as opposed to the multitude of flies (low-level officials) who have also been caught up in the investigations. Until the advent of Xi’s campaign, many of these figures were considered untouchable.

The CCDI categorized the convicts in order of importance into central-level cadres, provincial-level cadres, and central-level cadres. Central-level cadres are the highest-ranking officials, such as provincial ministers. They are appointed or dismissed by the CCP Central Committee. Provincial-level cadres are headed by provincial branches of the CCP; their ranks include mayors and city secretaries. The third group includes somewhat less important officials, such as directors of state-owned enterprises. For the sake of simplicity, we will refer to these officials as the national, provincial, and local nomenklatura, respectively.

An analysis of the CCDI data reveals the extent of corruption by rank of officials. Compared to surveys of Chinese urban households (tigers tend to live in urban areas), these data allowed us to estimate the legal income of those convicted of corruption and their position in the urban income distribution, revealing their importance in ordinary economic and political life and where exactly their corruption took place. By comparing the defendants’ estimated legal income with the amounts they were accused of embezzling, we calculated the extent to which corruption increased their income, the extent to which it allowed them to climb the income distribution ladder in China, and how this corruption affected levels of inequality in Chinese cities.

Unsurprisingly, the data show that the more senior the convicted official, the greater the scale of the officials’ corrupt activities. Members of the national nomenklatura were convicted of embezzling more than four and a half times more money than members of the provincial nomenklatura and more than three times more than members of the local nomenklatura. The highest-ranking officials listed in the dataset were charged, on average, with embezzling $14.1 million, the provincial nomenklatura with embezzling $2.8 million, and the local nomenklatura with embezzling $4.3 million. (Local figures are higher than provincial figures because they include many state-owned business executives for whom corruption appears to be particularly lucrative.) Members of the provincial nomenklatura are charged with the bulk of corruption cases (two-thirds), but since embezzlement by national nomenklatura officials is much greater, two-thirds of total corruption measured in monetary terms is linked to them.

The convicted officials almost all come from the upper echelons of China's urban population. More than half of them are said to be in the top 5 percent of the urban population, with their legal income alone; about 6 percent are said to be in the top 1 percent, with annual incomes of more than $30,000 per person (or $120,000 per household if the household consists of four members).

By contrast, the average defendant earned between four and six times more than his or her legal income through bribery. This pushed the defendants to the top of China’s urban income distribution. When their illegal income was taken into account, 82 percent of those guilty of bribery were in the top 1 percent of urban residents, and almost all were in the top 5 percent.

Corruption itself is heavily concentrated at the top, with the top 10 percent of cases responsible for 58 percent of the total amount embezzled. In contrast, the top 10 percent of people in Chinese cities earn 33 percent of total income. The concentrated nature of corruption, and the fact that it has benefited people who were already among the richest in the country, shows that corruption, in its exposed form, is a major contributor to China’s urban inequality.

PUBLIC PROSECUTION OF PRIVATE GAINS

These results demonstrate the considerable scale of corruption at the top of China’s urban income distribution. Even those with high legal incomes can multiply their incomes, on average, by a factor of four to six, and some, of course, by more. These results imply that real income inequality in the country is much greater than the levels of recorded inequality. After all, corrupt incomes are not reported to tax authorities and are unlikely to be mentioned in household surveys. Nevertheless, the conspicuous consumption of elite members and their lifestyles make corruption obvious to observers. Xi’s campaign, whatever its political motivation, is likely reducing income inequality and, perhaps more importantly from the authorities’ perspective, curbing excessively high incomes and the concomitant display of that wealth.

This result may explain the campaign’s popularity. Anti-corruption campaigns, especially those that do not shy away from targeting the very rich and powerful, can be useful to autocratic regimes in bolstering their populist credentials. Russian President Vladimir Putin’s recent purge of corrupt generals in the midst of war is unusual, but it follows quiet anti-corruption measures that began simultaneously with the invasion of Ukraine. The Angolan government’s trial of businesswoman and former political heiress Isabel dos Santos has also proven popular. Vietnam recently engaged in a similar clean-up at the top of its Communist Party.

Observers have found Xi Jinping’s anti-corruption campaign to be ruthless and often vindictive in its targeting of potential rivals. But overall inequality in China, as measured by the Gini coefficient, which ranges from zero, a hypothetical case of complete equality in which everyone earns the same amount, to 100, another hypothetical case in which a single individual earns all the income, has declined over the past decade, from a peak of 43.7 in 2010 to 37.1 in 2020, according to World Bank data. Whatever its sins, the anti-corruption campaign has sought to address both symbolically and in real terms the country’s rampant inequality.

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