The furore over The New York Times's exposé of the $2.7 billion assets amassed by the family members of Prime Minister Wen Jiabao has raised many questions about China. The most important one is whether the People's Republic, its name notwithstanding, has become another kleptocracy - a country where a small group of ruling elites have acquired huge wealth principally through the abuse of political power.
Until recently, most people would have found the question absurd. Kleptocracy is a far more common phenomenon in resource-rich societies where the control of mineral and energy resources by the ruling elites can yield enormous private wealth. In a diversified manufacturing-based economy, capital is more mobile and wealth accumulation is based more on competitive advantage than on control of natural-resource wealth.
This theory is not wrong - except in countries where the state plays a dominant role in the economy. In that case, the ruling elites can, through their control of economic resources (particularly fixed asset investment) and regulatory authority, enrich themselves beyond one's imagination very quickly.
China is such a case. Despite three decades of market-orientated reforms, the Chinese state remains deeply and extensively entrenched in the economy. The financial system is firmly in the hands of the state. The government controls the largest firms, most of them monopolies, through complete or majority ownership.
Direct ownership by the state creates ideal conditions for the elites to steal public property, either by stealth privatisation (transferring valuable assets, such as coal mines and land, to themselves) or by paying themselves high incomes (in China, such incomes are mostly in expensive perks).
Most of the corruption takes place through fixed-asset investments and government procurement. China invests about 45 per cent of its GDP in fixed assets, primarily infrastructure, manufacturing and housing. Because more than half of the investment is undertaken by the state, the ruling elites have abundant opportunities to inflate prices or demand kickbacks.
Based on international experience, the average amount of bribery involved is roughly 10 per cent of the cost of a contract. If this estimate holds for China, which Transparency International considers slightly below average in terms of the severity of corruption, officials can easily steal roughly 3 per cent of GDP through government-directed investment alone.
If we factor in procurements by the government (which account for roughly 35 per cent of GDP) and burdensome regulations imposed on private businesses, kickbacks and bribery could add another 1 to 2 percentage points of GDP. Applying the most conservative method, we might get the figure of 4 to 5 per cent of GDP, or $280 billion to $350 billion (Dh1 trillion to Dh1.3 trillion), as wealth stolen by China's ruling elites through corrupt activities each year.
The ruling Communist Party, even with 82 million members today, represents only 6 per cent of the population. Within the Party, only those with power, an even smaller group, have the ability to gain access to this pool of wealth. So the higher a person is on the food chain, the more wealth he can acquire. Of course, at the highest level of the Chinese state, such illicit wealth normally is acquired by family members, not the leaders themselves. Based on investigative reports by the western media, several top leaders' families have amassed assets worth hundreds of millions of dollars, if not more.
Such evidence suggests that corruption has become not just endemic in the Chinese system, but heavily concentrated at the top - contrary to the popular perception in China that local mandarins are venal but the emperor (the top leadership) is good. Another myth about corruption in China is that the regime has fought a heroic and harsh battle against this scourge.
If you believe the official media and pledges by senior Chinese leaders, you might have the impression that they have taken their best shot at making corrupt officials pay. China is one of the few countries where corrupt officials face the death penalty.
But the reality is completely different. Based on data released by the Party's anti-corruption agency and the country's supreme prosecutor's office, only 3 to 6 per cent of the Party members found to have engaged in wrongdoing are prosecuted each year. Of those prosecuted and convicted, only 30 per cent serve any jail time. Few government ministers have been executed for corruption.
Such leniency makes corruption a low-risk, high-return activity.
But China is paying a huge price for this kleptocracy. Corruption has made its economy less efficient and more risky (think of the huge value of bad loans used to finance infrastructure projects that have become gold mines for greedy officials). It has definitely worsened inequality. Even the regime is not spared the ill political consequences of corruption: its legitimacy has plummeted.
Fighting corruption represents one of the most difficult challenges for China's new leaders. International experience shows that only open economic competition, civil liberties and press freedom can curb corruption.
In the 1980s, a top Party leader brilliantly summarised the dilemma in dealing with corruption. "Corruption will kill the Party," he supposedly said, "but fighting corruption will kill it, too."
Three decades later, nothing seems to have changed.
Minxin Pei is a professor of government at Claremont McKenna College in California