Commentary Magazine


Topic: high oil prices

Will Corruption Halt Chinese and Russian Development?

To follow up on my earlier item, regarding barriers to China’s economic development: nothing makes the point more poignantly than news that China’s richest man has just been sentenced to 14 years in jail. Huang Guangyu has been accused of assorted corporate crimes, but few think he is another Bernie Madoff. More likely he is just another corner cutter engaging in the sort of routine practices, including bribery, that other Chinese tycoons engage in. The general view is that he simply wasn’t very skillful politically and got on the wrong side of some powerful faction within the ruling Communist Party.

In some ways his case is reminiscent of that of Mikhail Khodorkovsky, who at one time was Russia’s richest man before clashing with the Kremlin, losing his company (Yukos), and being sent to prison. China, like Russia, lacks the rule of law — an impartial set of rules enforced by neutral judges. Instead it has the rule of current and former Communist Party apparatchiks who manipulate the law to their own advantage. Admittedly the problem is more severe in Russia, but, as Huang Guangyu’s case demonstrates, it also exists in China. That makes both countries high-risk investment propositions and puts their futures in grave doubt.

The full impact of these weaknesses hasn’t yet been felt. Russia has been propped up by high commodity prices, in particular by high oil prices; China, by Western euphoria about its prospects, which has led to a lot of questionable foreign investments. But unless both countries can fundamentally reform their political systems (and odds are against them), I predict that their development will hit a brick wall before long — or if you prefer, a bamboo curtain.

To follow up on my earlier item, regarding barriers to China’s economic development: nothing makes the point more poignantly than news that China’s richest man has just been sentenced to 14 years in jail. Huang Guangyu has been accused of assorted corporate crimes, but few think he is another Bernie Madoff. More likely he is just another corner cutter engaging in the sort of routine practices, including bribery, that other Chinese tycoons engage in. The general view is that he simply wasn’t very skillful politically and got on the wrong side of some powerful faction within the ruling Communist Party.

In some ways his case is reminiscent of that of Mikhail Khodorkovsky, who at one time was Russia’s richest man before clashing with the Kremlin, losing his company (Yukos), and being sent to prison. China, like Russia, lacks the rule of law — an impartial set of rules enforced by neutral judges. Instead it has the rule of current and former Communist Party apparatchiks who manipulate the law to their own advantage. Admittedly the problem is more severe in Russia, but, as Huang Guangyu’s case demonstrates, it also exists in China. That makes both countries high-risk investment propositions and puts their futures in grave doubt.

The full impact of these weaknesses hasn’t yet been felt. Russia has been propped up by high commodity prices, in particular by high oil prices; China, by Western euphoria about its prospects, which has led to a lot of questionable foreign investments. But unless both countries can fundamentally reform their political systems (and odds are against them), I predict that their development will hit a brick wall before long — or if you prefer, a bamboo curtain.

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