corruption culture in the united states and china - gcbe chamut.docx · web viewcorruption...

2015 Cambridge Business & Economics Conference ISBN : 9780974211428

Corruption Culture in the United States and

China

Akram Chamut, University of Texas at Dallas

July 1-2, 2015Cambridge, UK 1


ABSTRACT

Purpose

The purpose of this paper is to examine most aspects of the corruption

that takes place in the United States and compare it to the corruption that takes

place in China by analyzing previous empirical research performed regarding

the matter.

Method

The information used for this examination was gathered from peer-

reviewed articles in which research was performed to study corruption levels,

triggers, consequences and perception in the United States and China.

Findings

The empirical research reviewed showed that, although there are many

similarit ies on both cause and effect of corruption in both countries, there are

far more differences. This is mainly due to the different cultures present in each

country.

Contribution



The analysis made in this document is original since i t compares the

factors that contribute to corruption and what the effects of it are in two

different countries with two very different cultures. This can contribute to the

business world by showing how corruption is performed in these two countries

and how it is perceived by their respective governments and citizens.

INTRODUCTION

In order to successfully conduct business in a foreign country, we must

not only understand the ethical and legal surface of a country. In fact, it could

be argued that i t would be even more important to understand the unethical and

illegal way of life that takes place underground, far out of sight from people

who are not involved. If managers can understand the legal and il legal conducts

of governments, corporations and individuals, they will have a significant

advantage over competitors who focus only on understanding what the law

prohibits and permits them to do. Furthermore, understanding corruption will

allow managers to create the necessary shields to minimize corruption in their

businesses both locally and abroad.

This document is comprised of a review of some scholarly peer-reviewed

regarding corruption in the United States and China. Hopefully, this will be an

aid to managers who wish to distinguish the differences and similarit ies



between the two countries in order to protect their organizations from potential

harm, whether it is financial, legal, or reputational.

Corruption

Most people, when they hear the word corruption, automatically think of

something or someone related to politics and, more often than not, view it as

something negative, and while political is the most common form of corruption,

it is not the only type. The types of corruption most relevant to this document

are detailed below.

Polit ical corruption, the most common and most relevant type of

corruption, is “the abuse of public power, office, or resources by elected

government officials for personal gain” (Shumba, Gabriel; 2007). There are

varying levels of political corruption depending on the country. In some

countries, polit ical corruption is of such a high extent that the government itself

becomes a kleptocracy , meaning “rule by thieves.” This occurs mostly when

government officials hold their posit ions for the sole purpose of increasing their

personal wealth at the expense of state funds.

Next, we have police corruption. Police corruption occurs most commonly

between individual citizens and individual police officers. Police can reach



such a high level of corruption that they will fabricate charges against

individuals to incite them to offer a bribe, which officers will gladly accept and

drop the charges. Other forms of police corruption include solicit ing bribes in

exchange of turning a blind eye to organized crime and other i llegal activities,

and also engaging in “noble cause corruption,” which, simply put, is the action

of planting incriminating evidence to be used against “definitely guilty”

criminals to ensure a conviction.

What follows areli terature reviews of academic articles regarding how

these types of corruption occur in the United States and China and what actions

are being taken, if any, to avoid i t. First, the articles will be analyzed and

summarized. Afterwards, a conclusion will be made encompassing all of the

articles and all the information gathered from them.

LITERATURE REVIEW

This li terature review will make use of the definitions described above to

compare different art icles regarding corruption in the United States and China

to better understand the differences and similarit ies between these two countries

and how to approach the problem should the reader encounter it.

United States



The first article that will be reviewed is “Isolated Capital Cities,

Accountabili ty, and Corruption: Evidence from US States,” which indicates that

capitals of states are more associated with corruption, especially if they are

isolated cities, since there is a reduction of accountability; there is less people

around who will inquire the government about its operations. Also, people from

cit ies further from state capitals are less interested in politics, less informed,

less likely to vote in state elections. This leads the authors to believe that

spatial distribution might be linked to corruption. Usually, capitals are far from

large metropolitan areas and face less scrutiny from them. Even the media is

affected by the distance from the capital city. This is evident by the way

“newspapers give more coverage to state politics when their readership is more

concentrated around the capital city.” During state-related elections, “voter

turnout is greater in counties that are closer to the state capital” (Campante, Do.

2014).

Considering the finances of state capitals, it seems that isolated capital cit ies

spend less while achieving worse outcomes on public services, and the media

does not do a good job in showing this, since “states with isolated capitals tend

to display lower levels of media coverage of state polit ics” (Campante, Do.

2014).

By this point, the reader might wonder how capitals are determined to be

isolated or not. The authors of the article, Campante and Do, express that “what

matters most for the connection is how isolated the capital city is relative to the

geographical size of the state.” So a smaller state with require smaller distances



from the capital to be considered isolated, while a larger state will require its

capital to be further from other cit ies.

Individuals are not the only ones affected by the isolation of capital cities,

“firms located in counties that are farther from the capital spend less in

campaign contributions,” as do individuals.

The authors conclude that “isolated capital cit ies are significantly correlated

with lower spending on public good provision, and with most spending on items

not directly related to i t” (Campante, Do. 2014).

The second article reviewed, “American Hustle: Reflections on Abscam

and the Entrapment Defense,” talks about Abscam, as the tile suggests. From

1977 to 1980, Abscam led to the convictions of six United States

Representatives, one Senator, and over a dozen of additional politicians and

government employees. FBI agents posed as wealthy Arab Sheiks to incite

polit icians into corrupt actions. Abscam resulted in public outrage since the

state, by enticing the crimes, may have entrapped the politicians.

The first recorded entrapment case in the United States, “ Woo Wai v. United

States ,” occurred in 1915, when Woo Wai was persuaded to smuggle Chinese

cit izens through the Mexican border into the United States by California

Immigration officials.



During prohibition, government agents init iated alcohol operations with the

intent to raid such operations and arrest the entrapped “perpetrators.”

Regarding Abscam, the courts and the public ended up tolerating it because it

“served” i ts purpose of eliminating a greater evil, which is corruption of public

officials. Abscam resulted in the creation of the Civilett i Guidelines, which

formalized the procedures to be followed during undercover operations to

prevent an intrusive FBI. The Civiletti Guidelines later evolved into the Smith

Guidelines in 1983, then to the Thornburgh Guidelines in 1989, and finally into

the Reno Guidelines in 2001, all extending protection of possible entrapment

victims by government agencies.

Matthew Kinskey, the author if this art icle, declares that “the best way to

protect citizens from overzealous law enforcement is for courts to fully uti lize

their position to provide oversight, leadership, and guidance to encourage

prudent government conduct” (Kinskey. 2014).

The next art icle, “Corporate Influence and Political Corruption,” talks

about the role of corporations as an influence for corruption on government

officials.

According to this art icle, “the role of money in politics and the influence of

corporations is much more limited than imagined by the conventional wisdom.

For many Americans, politics is an inherently corrupt activity” (Milyo. 2014).



A very prominent activity performed between corporations and political entities

is lobbying. “Campaign contributions and lobbying are often characterized as

corrupt. Privately financed polit ical campaigns facilitate a market for political

favors. Lobbying and polit ical contributions may have effects that are difficult

for researchers to observe and may provide large payoffs to firms that engage in

such activit ies” (Milyo. 2014).

During Jeffrey Milyo’s research, he found that “Republican-connected firms

realized posit ive abnormal returns after the 2000 presidential election, whereas

Democrat-connected firms realized negative abnormal returns” (Milyo. 2014).

One way polit icians and corporations mutually benefit is when a politician has

knowledge of inside government information that a corporation might be

interested in knowing. “Polit icians may profit from market-relevant inside

information about public policy. Polit icians confer policy favors to personal

cronies in exchange for inside information and preferential business deals for

themselves, their families, and their friends” (Milyo. 2014).

U.S. state spending is affected by corruption as well, as expressed in the

article “The Impact of Public Officials’ Corruption on the Size and Allocation

of U.S. State Spending.” This article declares that “self-interested public

officials are l ikely to design and manipulate government institutions to

maximize budgets for their own private gain. Budgets of states with a higher

degree of corruption will become larger. Corruption may distort public resource



allocation because of rent-seeking behavior among related agents. When

allocating public resources, corrupt officials favor sectors with greater rent,

higher secrecy, and less competitiveness. Corrupt public officials are likely to

spend public resources on items for which it is easier to levy larger bribes”

(Liu, Mikesell. 2014).

During the research performed to create this article, the authors surveyed

several individuals to find their perception of corporate-government corruption

and asked them which industry was more likely to engage in corrupt actions

with the government. The result was that “the construction industry is

consistently marked as one of the most corrupt industries” (Liu, Mikesell .

2014).

Other factors are evident in states with higher levels of corruption. For

example, “total salaries and wages of public employees are likely to be higher

in states with higher levels of corruption.” Also, “states with a higher extent of

corruption tend to spend more on correction and police protection.” One

special, and very important public service affected by corrupt states is

education. “Total expenditures on education are likely to decrease in states with

higher levels of public officials’ corruption.” But education is not the only

public service affected. “State government expenditures on public welfare,

health, and hospitals tend to be lower in states with higher degrees of

corruption” (Liu, Mikesell. 2014).



The next art icle, “PACking a Punch: Political Action Committees and

Corruption,” investigates whether Political Action Committees (PACs) have an

influence over the levels of corporate-political corruption. In this article, it is

asked if “Political Action Committees (PACs) might resort to illegal means

such as bribery to further their agendas.” Some people believe that contributing

to PACs could be considered a legitimate form of bribery. The sizes of both

government and population are extremely relevant determinants for corruption.

Therefore, the more PACs there are, the more corruption there is l ikely to be.

Income is not relevant to corruption. All income levels can be involved in

corrupt acts, although they may not be similar in form.

PACs are related to all levels of government; all the way from local up to

federal. Corporation PACs are mostly involved at the local and state levels of

corruption, since they would be easily exposed at the federal level.

The results for this research show that PACs definitely have an influence over

corruption, whether i t is directly or indirectly. “PACs are positively associated

with corrupt activit ies,” and “judicial employment is posit ively t ied to

corruption” (Goel. 2014).

The judicial system of the United States is extremely prone to corrupt and

to be corrupted, as seen in the article “The Jury and Participatory Democracy.”

This article demonstrates how, during civilian-government disputes, judges

could be bribed and often favor the government. It was also found that “the



selection of jurors could be corrupt and the jurors themselves could be bribed,”

and that “judicial elections present serious concerns about corruption and lack

of independence; in part as a result of judicial reliance on donations” (Lahav.

2014).

During polit ical campaigns, some donators do not simply contribute out

their support for their selected candidate. They expect something in return.

That’s what the next article, “Campaign Cash and Corruption: Honey in

Polit ics, Post-Citizens United,” talks mainly about. When a situation presents

possible conflicts of interest, there are countless opportunities for corruption

and bribery to take place, and when people around such situation are unaware of

it, there is an even higher probability that bribery and corruption will take

place. When public officials realize that here is nobody watching, they are more

probable to make use of the situation at the expense of the good of the public.

Many organizations have the support of politicians whom they have and sti ll

support. “Outside organizations are supposed to be independent but actually can

be closely tied to specific candidates of elected officials.” In return for their

support, “organizations are able to accept contributions with essentially no

limits and no prohibitions on resources” (Krumholz. 2013). Individuals and

organizations not publicly known can have extensive influence on political

policies.



A very brief article, but that describes very well the effects of corruption

scandals on congressmen is “Scandals and Congressional Elections in the Post-

Watergate Era.” In this article, it is declared that congress-related corruption

can consist of obstruction of justice, conspiracy, influence peddling, and

bribery. “Corruption scandals appear to have the worst effect on the

incumbent’s vote” (Basinger. 2013) making him or her lose the election and

possibly any other opportunity to recover their polit ical career.

In 2010, the city of Bell, California was involved in a scandal where

public officials were giving themselves a salary more than 300 times larger than

it is usual for the same positions in other cities of about the same size. That is

the event “Lessons of Bell, California” talks about.

In 2005, public workers in Bell , California altered the electoral process in

which it would be decided whether Bell would become a charter city by

removing a clause from the ballots that specified that there would also be no

limit in the pay of council members, although the election did include such

clause. The election passed and the result was that they were able to give

themselves ridiculously high salaries and other bonuses. Officials used portions

of the Home Rule Charter to benefit themselves while the public remained

unknowing of it. The irony here is that Home Rule was actually created to

prevent corruption.



This case has been compared to corruption common in underdeveloped

countries, and some of the people involved come from Latin American countries

where corruption is a common practice. This comparison stems from the fact

that when the public is uninvolved and government can decide without public

input, corruption is l ikely to occur.

These are all the articles reviewed for the United States portion of this

paper. The next section will be about how corruption takes place in China and

how it is being dealt with.

China

In “Income Inequality, Fiscal Redistribution, and Governmental

Corruption: Evidence form Chinese Provincial Data,” one learns that officials

and individuals who make a profit from corruption tend to favor higher taxes

and more control regarding public projects.

Corruption creates huge gaps between incomes, making china a country with

high income inequality. Tax and spending further contribute to income

inequality, and “as the expenditure increases, the tax becomes heavier, and then

the corruption becomes worse.” The result is that “a considerable portion of the

extra-budgetary revenues go directly to the pockets of corrupt officials” (Mi;

Liu. 2014).



China is one of the countries with a severe case of corruption. Corruption in

China consists of both individuals and groups. Collective corruption has been

increasing year after year, and it has spread to the judicial authority, personnel

departments, law enforcement authority, general economic management,

education, and other government leading organs. “Corruption had an adverse

impact on Chinese economic development and brought about a certain amount

of economic losses” (Mi; Liu. 2014).

Even though China has been economically improving, corruption has been

increasing. Public services are not being performed without malice, “there are a

large number of order apertures or system vulnerabilit ies that can breed

corruption.” Rich groups and individuals constantly block policies that might

benefit the poor.

Corruption in China is not proportional to the size of government. The rich have

more motivation and opportunity to be involved in corrupt acts, while the poor

are more easily extorted and powerless enough to have to accept corruption.

Individuals with lower income are more probable to offer bribes to be able to

access different public services. Income inequality causes corruption, and

corruption causes further income inequality. “Corruption exists in government

expenditure. Corrupt officials may spend more public resources on the public

projects that facil itate their confidential corruption. Policies that reduce

corruption will most likely reduce income inequality and poverty as well” (Mi;

Liu. 2014).



Not only does corruption create income inequality, i t also affects all public

services. Education spending is reduced by corruption, for example. For

cit izens, the tradeoff of corruption in exchange of welfare is not appropriate.

In addition to the situations described above, “corruption also exists in tax

collection.” As tax rates increase, tax revenue decreases due to corruption and

tax evasion. “Corruption is similar to a regressive tax, it does more in punishing

the poor than it does the rich” (Mi; Liu. 2014). To reduce corruption, spending

and taxing must also be reduced. People who do not engage in corrupt activit ies

have higher tax expenditures. Not only metropolitan areas are affl icted from

this, neighboring provinces have similar corruption rates.

The next art icle, “China’s Strategic Censorship,” talks about government

control over media reporting. Government controls the quantity of investigation

for reporting purposes, leaving many local issues unattended and hidden from

the public. “The risk of being exposed in the media acts to check corruption by

local officials.” Unless the levels of corruption are too high, the government

will try to keep local reporting to a minimum.

When the economy is thriving, corruption is not perceived as negatively as

when there are high social tensions. If the quantity of investigative reports

increases, there is a higher probability that a public official who engages in

corrupt acts will be exposed. When the public has a high level of discontent,

government will allow an almost unlimited amount of investigative reports



where corrupt officials might be exposed. Although the government tries to

keep the public uninformed about people’s discontent, they must allow some

information to leak when reports on corruption are published, since they also

want to keep corruption levels to a minimum. If there are high levels of tension

within the society, but corruption is not a major issue, the government will

restrict investigative reports, but if corruption is a major issue, then they will

allow reporting to take place.

The government has also placed restrictions for what officials spend

public funds on, forbidding them from purchasing expensive, unnecessary, or

foreign products, as can be read in “China’s Crackdown on Corruption and

Government Spending: A Timeline.” According to this article, there have been

several recently passed rules that prohibit public officials from using luxury

cars, as well as l imiting official dinners and other galas, and eliminates

extravagant gifts for officials, along with other privileges that they have

enjoyed in the past. “The regulations have allowed the Xi administration to

single out officials for punishment, starting at the local level and moving up the

ranks of party hierarchy” (Donovan. 2014). Bans allow every single official to

be vulnerable to crackdowns, from the lowest to the highest levels.

The restrictions placed are many, and more than helping combat corruption,

they help boost the Chinese economy, since many of the product that were

banned must now be replaced by similar ones made in China. Several brands of



foreign luxury vehicles can no longer receive police or mili tary l icense plates,

the Chinese army can no longer purchase foreign brands of cars, public funds

can no longer be used for galas or dinners, and some types of outlandish food

have been prohibited in these events, as well as expensive brands of l iquors and

cigarettes, and public funds have been restricted with regard to travel expenses.

“Such action-oriented policies against corruption and spending are l ikely to

have a positive effect on the Chinese public’s perception of governance, but an

adverse effect in the global market for luxury goods” (Donovan. 2014). High-

end services and products, such as hotels, have experienced a considerable

downfall in the amount of services provided, and consequently in earnings and

profit.

Corruption in China does not only involve the government and some other

party, business-to-business corruption is a major concern as well, as discussed

in “The Dark Side of Business with Chinese Characteristics.” In China,

corruption between businesses is as il legal as corruption with government

involvement, although business-to-business corruption is not seen as negatively

as government corruption by the public.

The article discusses a theory that dictates that if corporate corruption spreads

within a society, it will create a culture of corruption and it will spread to the

government as well. Since China owns a considerable amount of enterprises,

there is an unclear dividing line between corporate and government corruption.



Most of the bribery that occurs is between businesses instead of it being

between businesses and government officials, and most of the people involved

in business corruption are not government officials. Government officials and

business agents engage in different types of corruption, among those are

embezzlement, bribery, and insider trading. Commercial corruption is made up

of networks of commercial agents and government officials.

The result of corporate corruption is that if a company engages in corrupt acts,

other companies will also engage in corruption in order to not be left behind.

Especially since bribes provide great ROIs for businesses. The fact is that

corruption is profitable and financially worth the risk. “It has long been obvious

that the business sector plays a major role in public corruption” (Wedeman.

2014).

Private parties can be a major creator of public corruption, and government

officials are suppliers of corruption because there is demand by the private

parties. If official corruption is to be attacked, first , private corruption should

be attacked.

In China, “corruption worsened as growth prospered.” This quote

describes the main focus of “Developmental Corruption in China,” the next

article reviewed.

There are two types of corruption, degenerative and developmental.

Degenerative corruption occurs when public welfare and the economy



degenerates due to corrupt actions. On the other hand, developmental corruption

occurs when there is economic growth and politicians are funded and rewarded

by companies to keep them in power to continue with their policies that favor

growth.

In China, corruption boomed when the economy started to be more market-

based. “Marketized reform was the engine propelling both growth and

corruption” (Wolf. 2013).

A perpetrator will measure his expectation of the outcomes from engaging or

not engaging in corrupt acts and will decide based on the expected payoff and

consequences of each choice. Consequences for corruption in China are much

more severe than in the U.S. Potential corrupt situations must be overseen by an

uncorrupted and independent institution in order to discourage possible

perpetrators.

An important aspect of corruption is how it is perceived by the common

cit izen. A survey was made to write the article “Perception of Corruption in 36

Major Chinese Cities: Based on Survey of 1,642 Experts” in which people who

are familiar with corruption and its effects were asked about what they believed

was the perception of corruption among cit izens. The survey discovered that for

the public, corruption that really matters is the one that occurs at a local level.

Coincidentally, the majority of corruption cases occur in local areas.



Corruption and efforts to eradicate corruption in Chinese cities have a

significant impact on the economic and political development of China, as well

as individuals’ day-to-day life. Only an extremely low percentage of all corrupt

acts become public knowledge.

Of all the sectors that are related to corruption, construction is the one with

most corrupt actions. Corruption in courts and police departments is of high

concern for citizens. The media provides an important share of information

regarding anti-corruption to cit izens.

A public official will mainly determine whether to engage in a corrupt act or

not by the probability of an investigation and consequent conviction against

them. Because of corruption, honest individuals lose an unfair competit ion, and

individuals who engage in corrupt acts have higher probabilit ies of prevailing.

The last art icle reviewed, “Economic Freedom, Economic Growth, and

China,” which is very short, describes some of the effects of corruption in

China. This article explains that “corruption erodes economic freedom by

introducing insecurity and uncertainty into economic relationships,” and that it

is “perceived as widespread in China” (Wu. 2011). Industries heavily affected

by corruption are construction, banking, government procurement and finance.

There appears to be a deficiency of courts and independent investigative bodies.



CONCLUSION

Through this l iterature review we were able to see that corruption is not

exclusive of a single country; it’s not even exclusive of a single culture.

Corruption is worldwide and every single person in the world has a propensity

to engage in i t. This leads to the conclusion that corruption is inherent of the

human nature. It is part of the so-called “survival of the fi ttest;” those who

truly want to get ahead, find the means necessary to do so, even if it means

bending or breaking a few man-imposed rules. Having said this, it would be

quite safe to assume that corruption is unavoidable and indestructible, but not

uncontrollable.

Corruption should be controlled to a certain extent, but should never be tried to

eliminate. The reason behind this is that corruption, although detrimental to

some, creates a higher probability of the “perpetrator” to grow, most probably

economically. This growth will quite unavoidably be passed on to other people

who receive the benefits gained by the “perpetrator” in exchange for products

or services, making the original corruption gains to be eventually returned to

society.

Let’s take, for example, governments where elected officials decide to increase

the infrastructure of their cit ies with the sole purpose of deviating some public

funds into their own and their friends’ pockets. Yes, society’s money is being

“stolen,” but a large part of it will be spent in construction workers’ salaries

and in products which will be purchased from specialized factories were other



employees work. All this money will be returned to the society from which it

was taken, maybe not in its entirety, but jobs are being provided for those who

need it, and the unemployment rates will be lowered.

Another example, with a different situation, is the one that led to the extensive

growth of the city of Las Vegas, Nevada. It is no secret that what once was a

small , insignificant town became a huge and fruitful city thanks to the

involvement of organized crime. Thousands, if not mill ions of people have

enjoyed the benefits that have come from the investments made into this city,

which came directly from il legal sources, and the same thing can be said about

Atlantic City.

So far, the examples have been regarding the United States, but China has also

greatly benefited from corruption. China is internationally famous for being the

“capital of brand piracy.” Brand piracy is a multi-bill ion dollar business in

China. Whether i t is movies, music, clothes, electronics or even perfumes, it is

extremely easy to find a knockoff product of a famous name brand, and China’s

economy thrived from selling these products worldwide. Affected brands have

tried to persuade the Chinese government to stop those engage in piracy, but

have not been successful. The Chinese government is not even trying hard

enough to stop them, the reason being that if they do, billions of dollars would

stop being dumped into their economy. China also engages in other forms of

corruption including intellectual property theft and industrial espionage,

benefiting even further. It is a fact that China is growing so fast, that it will

most probably be the next superpower, and corruption has definitely helped.



The truth is that corruption works. It makes things flow easier and faster, and

the gains can be enjoyed by everyone who even has an indirect involvement in

the situation. The benefits are never completely kept by the “perpetrator,” they

are passed on.

SUGGESTION FOR FUTURE RESEARCH

In the conclusion i t was said that corruption is useful for helping society

prosper and grow and some examples of such situations were provided. Through

the l iterature review, it was noted that big, wealthy cit ies have a high degree of

corruption. Therefore, it is of the author’s belief that future research should

involve an investigation of what effects total corruption eradication would have

on society and how a city, state or country would be economically impacted by

it and researchers can look to the work of Carraher and colleagues (1991 to

present) for suggestions of factors to examine in relation to corrupation.

Advantages and disadvantages should be carefully examined and weighed in

order to determine whether corruption should be tolerated or if it should be

eliminated from society.



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