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The Sunday Paper – Disguised Corruption: Evidence from Consumer Credit in China

Corruption, by its very nature, is hard to pin down. In the paper highlighted this week though researchers have used privileged access to a big bank’s data [They don’t say but I’d bet its ICBC] and appear to have flushed out a very interesting variety.

Sumit Agarwal from Georgetown University, Wenlan Qian  from the National University of Singapore, Amit Seru from Stanford University and Jian Zhang from the Hong Kong Baptist University analyzed data for credit card usage from their friendly bank to see if there was any difference between how government officials were treated versus lesser citizens? There was, and it was big.

In their survey government officials, on average, were likely to have a 15% higher credit line than the control group. Moreover, they exhibited higher delinquency rates and, here’s the zinger, enjoyed more debt forgiveness. The bank therefore appears to be using debt forgiveness as a bung; but why would they do this?

The researchers went on to find a relationship between bank branches handing out the most of these de facto brown-envelopes and their level of deposits either from government entities or groups, SOEs for example, related to them. They speculate there may have been other benefits exchanged. Perhaps the bank is getting new branches set up faster as a result of building, health and safety and related certificates coming through with less red-tape?

The practice is most pronounced in areas high up on an OECD index of inefficiency [Shouldn’t that be ‘corruption’? Ed.]. Senior cadres get more indulgence which seems to confirm what’s going on; but where’s the harm? The study shows that in areas where banks are greasing palms most enthusiastically average customers are getting lower credit lines. This in turn seems to explain a lower rate of small business formation in these areas.

This would all be quite depressing were it not for the fact the survey period covered the two years 2003~2005, a long time before Mr. Xi Jin Ping’s team began extirpating tigers and flies. In the paper the team showed these practices are regularly eradicated after an anti-corruption crack down in a particular area and since 2005 there have been many of these; but do we believe the practice has been eradicated?

Not likely; but the paper provides investigators with another useful flash-light to illuminate practices that without this work may have been explained as government employees simply being better risks (a cross check was performed, they’re not).

You can access the paper in full (conclusions on P.25) via the following link Disguised Corruption.

Happy Sunday

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