Big Projects, Fat Pockets

Wednesday we looked at part of the reason why Chinese officials like massive projects, and today we’ll be looking at the another major reason: corruption. This factor helps to explain why local governments are so eager to build infrastructure, but struggle to find money for schools, and why the National government continues to favor single major projects.

It’s no secret that China has thousands (hundreds of thousands? millions?) of officials who use their positions for extra gains.

Starting at 1:58 (What do you want to be when you grow up?)
Boy: I want to be an official
Interviewer: What kind of official?
Boy: A corrupt official, because they have many things.

This endemic corruption is essential for understanding not only infrastructure projects, but China as a whole. This problem of pocketing public funds and taking bribes has plagued China for thousands of years.

Why does the size of the project matter?

It’s simple, the bigger the project, the bigger the opportunity for graft. After all gov’t sources usually point out that as a percentage of major projects, the total amount “missing” is small. For example lets look at the Beijing-Shanghai high-speed rail, which had a budget of nearly 33 billion RMB (~$5 billion) .  Of that budget over 180 million RMB (~$28 million) was “misappropriated” and the Railway Minister was sacked for (allegedly) accepting nearly 800 million RMB (~$120 million) in bribes. Yet online it is emphasized that this is less than 1% of the total budget.

So it’s not surprising that city governments are eager to build massive new railway stations and airports, even though those projects are in many ways redundant. They are seen as opportunities to get rich. Not to mention that these projects are also racking up debt (some estimate more than 10 trillion RMB of debt at the local level), and are a major source of illegal demolitions and lost farmland.

Interesting note: There were 23,000 cases of illegal land use, but only 73 officials were blamed. Assuming 3 cases/official would be a 1% chance of being punished. Punishments were “warnings or demotions.”

Why does the National government continue with these massive projects?

One part is that infrastructure helps grow China’s GDP, government and real estate projects make up 70% of the total (we’ll look at the benefits of this on Monday). To put this number in perspective, in the US these figures account for about 20% of the GDP, and just before Japan’s building bubble burst in the 1980’s it was 35%.

Also as Ken Pomeranz noted in an interview on The China Beat (great blog), China had opted for the far costlier water transfer project, which will draw water from the South to be used in the much drier North, instead of fixing millions of leaky faucets and fixing irrigation canals. The reason he points out is that leaders in Beijing know that it is much easier to oversee one big project.

As Mark Twain would observe, China has opted to put it’s trillions of eggs into just a few giant baskets, so that it can more easily watch those baskets. Essentially the National gov’t is admitting that entrusting hundreds of smaller projects to the thousands of officials is a recipe for failure (or disaster).

Monday we’ll be looking be looking at why these projects are important for common people and China’s future.

8 responses to “Big Projects, Fat Pockets”

  1. John Scotus says:

    Yep, yep, yep. Graft is the name of the game.

  2. Chopstik says:

    >>Essentially the National gov’t is admitting that entrusting hundreds of smaller projects to the thousands of officials is a recipe for failure (or disaster).

    Well, that’s certainly one way of looking at it. Another would be that it’s easier to get recognition when you head up a really huge project (ask Li Peng) than fixing the smaller ones that may actually be more cost-effective and efficient…

  3. yaxue c. says:

    Consider the recent flood in several large cities: how much China has down to build/expand it drainage system, as opposed to all the glorious construction above the ground, is something worth looking into.

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  5. Paul says:

    One thing I have wondered about for quite a while, yet have never heard mentioned is that all the money officials siphon off these projects (or otherwise take as bribes) is counted twice for GDP purposes. It may not be a huge amount per project, but I would think that it would certainly add up to a significant amount of overall GDP.

    • Tom says:

      It would certainly add up. I wrote a few posts about China’s GDP (check the archives), and how it is can be so large, and yet China remains a developing country (only part of it is the fact that there is a large population).

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