The New Chinese-Backed Infrastructure Bank: Will it Tame the Corruption Dragon?

Asian governments are welcoming China’s recent decision to establish a bank to finance infrastructure across Asia.  As Devex reported June 2, China plans to capitalize it with an initial $50 billion with the possibility of increasing it by an additional $100 billion.  For China, the bank is one more way to assert leadership in the Asian region.  For Asian states leery of relying on the Western-led World Bank and Asian Development Bank for financing public works, the bank is a chance to diversify.  For both the lender and borrowers alike, the bank offers the chance to profit from Asia’s economic dynamism.

The Chinese-led bank will have to overcome many challenges to realize these objectives, the most difficult of which may well be preventing corruption from infecting the projects it finances.  Infrastructure corruption produces half-built roads, dilapidated ports, and white elephants of all kinds.  It leaves borrowing governments indebted for under-performing, over-priced assets while stirring a backlash against the lender.  Will the new bank and its principal backer be able to keep the corruption dragon at bay?   There are at least three reasons to worry that it won’t. 

The first is simply that corruption-proofing public works construction projects will be an extraordinarily difficult task given corruption’s deep roots in the industry.  In 2002, 2008, and again in 2011 a cross-section of global business leaders told Transparency International that the “public works/construction sector” was where bribery was most common, ahead of the oil and gas industry, the arms trade, and a long list of other industries.  The 2011 survey probed further, asking respondents to distinguish between i) bribes paid to low-level public officials, ii) bribes and illegal contributions to high-level officials and politicians, and iii) bribes paid to other firms.  On all three, business leaders ranked the construction/public works sector as the one where bribery was most likely to be found.

A second reason to worry that the new bank will not be able to suppress corruption is that bribery is simply one form corruption in the industry takes and likely not the most difficult to weed out.  Bid rigging is endemic, the result of structural features that are immutable.  The industry’s product is simple and relatively undifferentiated;  bid procedures are transparent; the business is cyclical and orders “lumpy”; demand is inelastic; there are a large number of heterogeneous buyers; and sub-contracting is common.  As an OECD analysis of the industry explains, the presence of any one of these makes an industry prone to collusion. The six together are a recipe for industry cartelization.

The United States has been at war with cartels since the 1890 enactment of the Sherman Antitrust Act and Europe since the creation of the Common Market in the nineteen sixties, yet neither has achieved complete victory, most particularly in the construction industry.  Both the Americans and the Europeans confessed to the OECD in 2008 that their construction markets continue to be plagued by cartels.  The fight against cartels in Asia is much more recent, and while Asia’s governments can learn from the American and European experiences, one lesson is that the fight is a long, slow slog.

A third reason to question whether the new, Chinese-backed infrastructure bank will be willing and able to contain corruption is the complex domestic politics behind China’s own fight against corruption, a subject Meng Lu examines in a forthcoming post.  The complexity apparently extends to corrupt activities by Chinese firms abroad.  The World Bank has sanctioned several large Chinese companies and a number of Chinese nationals for corruption in its infrastructure projects, but so far there are no reports of the Chinese authorities investigating or prosecuting any of them.  Indeed, in 2011 the government expressly refused a World Bank request to take action against the state-owned firms that had participated in a bid rigging cartel on a Bank roads project in the Philippines.  Are the firms too powerful for the government to prosecute?  Are the authorities blind to the harm such corrupt activities wreak?

There are measures the new bank could adopt to reassure potential borrowers that it takes corruption seriously and is committed to preventing it.  I will discuss them in a future post.

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