Saturday, June 18, 2011

Is 2011 the Present Era's 1979?

The Soviet Union seemed permanently powerful in 1979. Ten years later it collapsed. Is 2011 this era's 1979?

I was watching a Chinese language TV news program the other night and saw this story: (in subtitles; I don't know Mandarin) Mistakenly-released report reveals embarrassing extent of Chinese corruption: (The Australian)

MORE than 10,000 corrupt Chinese officials collectively took $120 billion out of the country in a 15-year spree of embezzlement, bribes and defections, with some of the money ending up in Australia.

The revelations, laid bare in a report by the People's Bank of China that was never intended to be released to the public, shine an embarrassing spotlight on Chinese corruption; a problem seen by some as an Achilles' heel for the world's second-largest economy.

The report appears to have been mistakenly uploaded to an official website after winning a prize for the quality of its research.

Official corruption remains a source of disgust and frustration to the Chinese population at large.

The pervasiveness of money laundering outlined in the report offers a damning indictment of the government's wars on corruption in the run-up to the Communist Party's 90th anniversary on July 1.

A handful of prominent cases, including one that involved the Ministry of Railways, have rattled China since the beginning of the year - but just as destabilising is the constant, low-level corruption that blights the lives of ordinary Chinese.

This week at least eight new websites came online to offer increasingly infuriated Chinese the chance to vent their anger - from “gifts” to doctors to perform operations correctly to the rigging of trials.

The report, which was compiled by the central bank's money-laundering analysts and called “The routes that our country's corrupt officials transfer assets abroad”, described eight main conduits for moving money out of China.

Methods ranged from the “high-risk” option of a suitcases full of cash and a dash to the border, to convoluted networks of foreign intermediaries.

Senior managers from listed companies or state-owned enterprises, it said, would disguise the illegal transfers beneath legitimate remittances, cloaking the process with forged contracts and other documents that were destroyed.

The report won first place in the China Society for Finance and Banking's annual awards for financial research and, despite the warnings that it was for internal central bank consumption only, was put online as the winner of the prize.

It was removed from the People's Bank website moments after domestic media spotted it and began publishing its findings.

So the PBOC estimated about 16,000 to 18,000 individuals have fled the country with ill-gotten funds over a 15-year period. The real question was posed by Beijing-based blogger (and one of my favorite reads) Maoxian: JUST IMAGINE HOW HIGH THE REAL NUMBERS ARE :-).

The Chinese TV news offered specifics not found in the Western media accounts.For example, the report cited one official from a poor Western province who had embezzled 100 million yuan in government funds. That is $15 million, a hefty sum in America, Australia or Europe but a fantastic fortune in China, where the per capita income is still a developing-world $7,600 (in purchasing power parity--in nominal currency, it is much lower).

On a per capita basis, China is between Ecuador and Algeria.

The key point in this report, in my view, is that these 16,000 officials did not escape with the system's run-of-the-mill bribes: they embezzled funds at the highest levels of local and central government.

Since I have Chinese sources (not just Westerners living in China who don't work deep inside the local government and thus have limited knowledge about how things actually work in China), then I can state that this embezzlement is merely the tip of an iceberg, most of which is standard-issue bribes and "gray money" collected by local officialdom as standard business practice.

In other words, embezzling $15 million in government funds is criminal, but skimming unlimited sums of bribes and "gray money" is simply normal life. As the Claude Rains character memorably says in the classic film Casablanca, "I am just a poor corrupt official." This line might be spoken by hundreds of thousands of lower-rank officials in China.

If $120 billion was embezzled by a relative handful of top officials, then ten times that amount has been skimmed in the course of normal business by lesser officials who have literally done nothing wrong within the current system.

So skimming $500,000 and transferring it to an account overseas by one means or another is "normal" and indeed expected. Having an overseas account and house and a green card or equivalent escape from China is an important "marker" of status in China. In other words, only the poor have no way out of China when the inevitable happens and the next revolution overthrows the current Status Quo.

If nobody considers this a risk, then why do the Elites all have overseas accounts and resident status outside China? We might rephrase this question several ways: what are they afraid of? If they trusted the current Status Quo to be permanent, then why make sure their families have green cards and homes in Canada, Australia, Thailand, etc.? What does this reality say about China and its leadership's expectations?

Another revolution in China is impossible, you say? Please step this way into the time machine and return to 1979. The year is usually remembered for the Iranian Revolution, and many commentators are comparing the current "Arab Spring" revolts to the systemic changes unleashed in 1979.

More interesting is the case of the Soviet Union in 1979, which appeared to all eyes as a permanent, stable political entity. The U.S.S.R. invaded Afghanistan on December 24, 1979, but that only seems noteworthy looking back from the present. At the time, there was still concern in the West that the U.S.S.R. would launch a blitzkrieg attack to conquer Western Europe.

While this might seem like a ludicrous worry now, in 1979 it was considered a very real danger, as described in the bestseller of that year, The Third World War, August 1985.

As I have recently noted here, the stability of a sand pile appears permanent until a random grain of sand sets off a cascade of collapse. Systemic instability is revealed at some unpredictable point, and what appeared permanent and unchangeable collapses in a heap.

One-party systems lack the mechanisms for adaptation, and thus they are exquisitely ripe for revolution and implosion. Democracies and republics tend to have periods of low-amplitude instability (witness Greece right now) that enable the system to adapt and experiment ("fail fast, fail small" being the preferred process of adaptation).

One-party systems, from the Liberal Democratic Party in Japan to the Communist Party in the U.S.S.R. and China, suppress the information and processes intrinsic to dissent, and thus build up intrinsically unstable systems.

As I noted in Why The Wheels Are Falling Off China's Boom , there are no mechanisms within China's machinery of governance to control the local government's constant, low-intensity corruption and abuses of power. That is typical of one-party states: limited by rigidity at the top, instability is squeezed into areas that are considered "safe": the mosques in Arab nations, and home mortgages in the U.S., for example.

Systemic instability is like water in a closed system: it cannot be compressed into nothing. As pressure builds, it will find the weakest section of the system and explode outward.

We all know hundreds of billions of dollars are taken out of the U.S. by Financial Elites using legal and quasi-legal tax avoidance schemes prepared by Panzer divisions of tax attorneys and greased by lobbyists and their bought-and-paid-for lackeys in Congress. Eventually, The citizenry of the U.S. could choose to form a new third party and evict the armies of corruption (Republican Corps and Democratic Corps). As unlikely as that option appears at the moment, it remains a legal option open to the citizenry.

Perhaps the apparent stability and permanance of the Communist, Republican and Democratic Parties is just that: apparent. Inherently unstable systems sre good at masking pressure beneath the surface. These invisible fault lines will snap and unleash the forces of change when few expect it.

Both China and the U.S. may be quite different countries by 2021. It's worth recalling that nobody saw the 1989 implosion of the Soviet Union a mere ten years before in 1979, so it is not surprising no one sees the implosion of the Status Quo in China and the U.S. ten years hence.

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