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Prosperity Spawns Crime

China's skyrocketing economic boom is accompanied by social problems

CHINA'S economy is booming. No one disagrees. My friends in China cannot help but be amazed at the extraordinary pace of China's economic development.

"We never had so much in our lives," said one friend. Never before have the Chinese people experienced such prosperity. But despite the rosy economic developments, one unresolved issue stands out: Never before has the rule of law become so essential and urgent to prevent the booming capitalist buds from rotting.

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A soaring crime rate has accompanied the massive efforts of China's central government to decentralize power and financial responsibilities. Economic development has prompted not only growth, but also greed. With getting rich as the ultimate end, the means by which the end is achieved are being ignored.

Recently, a friend from China sent me some cassette tapes of Chinese pop songs. One of the most popular in the last couple of years satirizes the power of money and how it corrupts. The song became popular because it struck a chord with the public's feelings about the side-effects of economic reform in China.

The pervasive greed unleashed by the economic boom has opened up a Pandora's box of social problems. The song sends a warning signal that certain people in China have already started to associate the soaring crime rate with the market economy. These misconceptions of the market economy, if left unchecked, will destroy the successful economic reform efforts. Russia's struggle with economic reform serves as a good lesson. Its attempt at economic reform has led to outcries for the restoration of communism.

The challenge facing China is the same, although at a different level, and from a different angle. Without taking adequate precautions to guard against the new risks and problems which free-market economies are known to present, China may face similar outcries for going back to the old way of life.

Of all the social problems, white-collar crime has become the most pressing. Street crimes may affect social stability and encroach upon people's peace of mind, but they do not have the same impact on the infrastructure of society as the white-collar crime epidemic. Reports note that in China economic crimes since 1984 have exceeded violent crimes. Economic crimes include embezzlement, counterfeiting, smuggling, and tax evasion.

The Chinese government is well aware of this problem, and, I am sure, is sincere in its desire to bring it under control. However, the measures taken so far can be analogized as trying to stop water from boiling by scooping it up and pouring it back, instead of taking away the fire wood from under the cauldron. Despite the call of state and party leaders and China's Supreme People's Court to "take strict measures" against fraud, tax evasion, smuggling, and other social ills, the problems seem to be growi ng worse.

Some people attribute the new crime phenomenon to want of laws and regulations. However, China's bureaucracy is no different from that of the United States or other countries. China's National People's Congress has enacted a wide array of legislation over the years, including laws dealing with economic contracts, international joint ventures, and bankruptcy.

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What is lacking are the legal mechanisms to vigorously prosecute the greedy, the evil, and the lawless. Effective legal mechanisms in turn require an independent judiciary.

AS an example to illustrate the importance of an independent judiciary, let's consider China's Stock Exchange Act, which is likely to be passed in its draft form this year by the National People's Congress.

Since the opening of the securities exchange in Shanghai in December 1990 and in Shenzhen in mid-1991, provisional measures have been implemented to regulate the issuing and trading of shares. They deal mainly with the qualification of issuers, issuers' disclosure obligations, and the relationship between broker/dealers and customers. An important part of the regulations, similar to Section 10(b) and Rule 10b-5 of the 1934 Securities Exchange Act in the US, is the requirement to disclose material facts a nd information.

In China, information is convertible into power and wealth, and it is usually restricted to those who have guanxi (connections). Thus, insider trading presents a far more serious problem than in other developed countries. Apart from the normative goals of fair market competition, enforcement, and successful prosecution of misrepresentations or material omission will indisputably serve as a deterrent against securities fraud.

Only with vigorous prosecution of insider trading and misrepresentation will investors' faith and trust in the fledgling stock market be installed and maintained. Only with vigorous prosecution will people realize that a market economy is not all about profiteering, not all about insider trading, not all about Michael Milken, and not all about Ivan Boesky.

The task of establishing an independent judiciary is Herculean. Yet it will be crucial for the success and stability of China's economic development. Over the past four decades, every major crackdown on criminal activities, especially those relating to white-collar crimes, resulted only in minor offenders going to jail. That is why Chinese citizens have become so cynical about law enforcement. A commitment to a healthy market economy through strict implementation of the nation's laws and regulations will

eventually overcome the hurdle of inexperience. Most importantly, it will establish people's faith, trust, and confidence in their legal system.

Recently, I was browsing through some Chinese books I brought with me when I first came to the US six years ago. One, titled "The American Political System," was published in Beijing in 1984. It misrepresented political life in America. For example, the chapter on the American judiciary described the high salaries and life tenure of American federal judges as sources of corruption; as a guarantee that the interests of the capitalist ruling class would be protected, and as sham democracy of the bourgeoisi e.

A fair reading of American history should convince the leadership in China that its current economic boom will be illusory unless it promptly installs an independent, strong, and courageous judiciary.

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