Corruption in China: Rio Tinto’s Turn

Claude Rains as Captain Renault and Humphrey Bogart as Rick Blaine in Casablanca.  Source: www.availableimages.com

“I’m shocked, shocked to find that gambling is going on in here!”

These were the words of Captain Renault, Vichy France’s chief gendarme in Casablanca (played by Claude Rains), when asked by Rick Blaine (played by Humphrey Bogart) why he was closing down Rick’s casino.  (See photo above.)  Shortly thereafter, the croupier hands Captain Renault his gambling winnings for the night.  In fact, Major Strasser of the Third Reich had ordered Renault to close the casino due to the boisterous singing of the “Marseillaise,” France’s national anthem.

This is the kind of cynical surprise one feels upon learning about the corrupt business relations between Chinese elites and executives of foreign mining companies.  The New York Times reported yesterday that Chinese authorities have widened the investigation into corrupt practices in the mining industry beyond the four employees of Anglo-Australian mining behemoth, Rio Tinto, detained last week.

Transparency International ranks 180 countries on perceptions of corruption,  i.e. business professionals are polled on how corrupt they believe these countries are.  China is tied for 72nd with seven other countries (Bulgaria, Macedonia, Mexico, Peru, Suriname, Swaziland and Trinidad & Tobago).  That is, seventy-one other countries are perceived as less corrupt than China.  One notch worse than China is Brazil; two notches worse is India; and thirteen notches worse is Russia, tied for 147th on the corruption scale with Syria, Bangladesh and Kenya (i.e. only 33 countries in the world are perceived as more corrupt than Russia).

This is all to say that China, though the least corrupt of its fellow BRICs, is still characterized by pervasive corruption.  Notwithstanding the executions of high-profile officials convicted of corruption, China remains challenged to reduce corruption in its society, which distorts its economy and restricts growth by allocating resources sub-optimally. Capital, labor and technology are directed not necessarily to sectors with the highest returns, but to those where connections and payoffs are made. 

One wonders why the Chinese authorities are singling out Rio Tinto?  Why not fellow Australian mining giant, BHP Billiton?  Why not Brazilian mining behemoth, Vale, aka Companhia Vale do Rio Doce or CVRD?  These firms have all pushed Chinese steel makers hard in the past by raising iron ore prices.  China is not only the world’s largest producer of steel, but also a huge consumer, fuelling its distorted capital-intensive, investment-intensive breakneck growth of the last two decades. 

What China needs in order to reduce corruption is not more high-profile capital punishment cases, but a free press and an independent, de-politicized judiciary and police force that will fairly implement and adjudicate the law.  Monopoly rule from the top makes it hard to develop such institutions.

Until and unless such institutions are allowed to flourish, we will continue to be “shocked” by the “gambling” going on in China.

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