Many folks who closely follow China and India know firsthand what is perhaps the most striking difference between the two today:
India cannot seem to finish its construction projects while China tends to build way more than it actually needs.
The irony here is that both of these outcomes are in large part the result of the same thing: Corruption.
Corruption features prominently in both China and India but each country has its own distinct flavor and preferred methods of corruption and these differences have resulted in outcomes on completely opposite ends of the spectrum. To know how this happened, one needs to understand the differences in the nature of what I call “industrial-scale corruption” in China and India today.
Ultimately, I believe that over-building is one notch less harmful to an economy than not being able to get stuff built in the first place. As such, I think that China is less corrupt than India today. However, I also believe that both countries would be better off if they were a little bit more like each other. The harmful effects of corruption could be mitigated somewhat if China were a little bit more like India and vice versa.
How do you measure something that doesn’t want to be measured?
Corruption is notoriously difficult to track because you are essentially trying to measure something that is itself trying really, really hard to be hidden and not to be measured. As I discuss in another Quora answer, even institutions that earnestly try to measure corruption such as Transparency International rely almost entirely on opinions from sources that are at best, not representative and thus skewed. True to its name, its Corruption Perceptions Index is based on measuring perception, which does not necessarily sync with reality, and does not do a good job differentiating between the different types of corruption.
You see, while all forms of corruption are harmful, some types are more harmful than others. By harmful, I am referring specifically to corruption's negative impact on the development of a country’s economy, quality of life and its ability to reach its full potential; after all, that is the crux of the matter, right?
When most people think of corruption, they imagine small-time everyday bribery where relatively small amounts of yuan or rupees change hands: getting shaken down by a traffic cop (I have experienced this firsthand in Mumbai) or paying the school principal to get your child into a better school (quite common in China).
While this run-of-the-mill type of corruption is of course harmful, I believe it is trumped by other forms of corruption that are less visible but, in my view, of potentially far greater harm to society because it often occurs at massive scale. This is the type of corruption I like to refer to as wholesale or industrial-scale corruption.
The harmful effects of this type of industrial-scale corruption can vary depending on how much is effectively stolen from the public or society-at-large. In the most benign cases, the rewards of mildly corrupt behavior might even serve as a financial incentive to motivate a corrupt but otherwise talented entrepreneur to work hard towards some goal that not only benefits the entrepreneur but also has some positive effects on society. In the worst cases, corrupt behavior is akin to outright theft on a massive scale and leaves society in a much worse position than before.
In China and India, you will be able to find corrupt behavior that runs the entire gamut. In fact, I think the distribution of corrupt tendencies is quite evenly distributed in any broad population. After all, corruption is driven by greed and greed is just a natural part of human nature. But what differentiates a society with relatively low corruption from a very corrupt one is the quality of its institutions — which can serve to minimize the harmful effects of corruption (if they are strong) or amplify them (if they are weak).
The “King of Good Times”
In India, one substantial method of corruption in recent years has been the practice of borrowing from banks with no intention of ever re-paying the funds or using them for the stated purpose. Often these funds are supposed to be used to build some sort of government-sponsored infrastructure project. But instead of investing the funds into the project, the project sponsor focuses instead on siphoning off funds through a variety of methods.
The net result of this method of corruption is an ocean of projects that are never completed, leading to an urban landscape blighted with half-finished construction sites and projects that have little hope of ever being completed. Not only do these “perpetual” construction sites add zero economic value to society, one can argue that they can actually cause major harm, as evidenced by the recent flyover collapse in Kolkata. This project was originally supposed to have been completed all the way back in 2010 but as is tragically common in India, multiple overruns meant that it was still only around “60 percent” complete by the time of the March 2016 collapse incident:
The construction for the 2.2-kilometre (1.4 mi) Vivekananda flyover was contracted in 2008 and the work began in 2009. IVRCL, a construction firm based in Hyderabad, won the bid for the project. The construction was scheduled to be completed in 2010 but overshot the deadline multiple times. The company was given an 18-month deadline by Chief Minister of West Bengal, Mamata Banerjee to complete the flyover by February 2016 and allocated a budget of nearly ₹165 crore (US$25 million) but only about 60 percent of the work was completed. As of March 2015, IVRCL had a debt of ₹4,055 crore (US$600 million) and reported losses of ₹672 crore (US$100 million). In December 2015, a consortium of banks that had lent to the company took over and the company had been banned from doing business in Uttar Pradesh and several other states.
Even worse, this method of corruption also impacts the many honest project sponsors that are earnestly trying to get their own projects online. Even if they are able to complete their own projects, they often depend on other infrastructure projects being completed in order to be effective. For example, a power plant will not work if the transmission lines connecting it to the main grid are still waiting to be built. A manufacturing plant cannot run efficiently if the road connecting it to major transportation arteries is still only halfway done.
The corrupt sponsors could get away with this because they understood that India’s enforcement system is relatively lax and/or poorly enforced. For example, bankruptcy laws are relatively weak and cases can get tied up in court for years without resolution. Meanwhile, a project can be milked dry with the money likely funneled outside the country along with the project sponsor and his family. This is an example of how poorly developed institutions can breed corruption.
The poster child of this type of corruption was Vijay Mallya of Kingfisher fame, popularly known as the “King of Good Times”. As reported in the press, in 2009 Mr. Mallya borrowed 7,000 crore (over US$1 billion) from the State Bank of India using his airline (Kingfisher Airlines) and the Kingfisher brand as collateral. Shortly thereafter, the airline started running into major problems, eventually going bankrupt in 2012 and being grounded.
An Indian friend relayed the story to me about how after being grounded, the airline’s planes were locked away in a secure hanger for a lengthy period of time and authorities were prevented from seizing the underlying collateral. When they finally gained access to the hangers, they found that the planes had been completely stripped of almost everything of value, leaving behind only an inoperable metal shell. The leasing companies that owned these planes ended up with major losses and Indian authorities had to work hard to restore the country’s credibility in the eye of creditors. Imagine how much better things would be in India if such ruthless efficiency in asset stripping had been applied to getting honest projects completed instead!
When the dust settled, banks were only able to recover around one-tenth of 1% of the total amounts borrowed (6 out of 7,000 crore). Meanwhile, the “King of Good Times” continues to enjoy life with his ill-gotten gains in the UK, despite the Indian government’s best efforts to have him extradited back and face charges.
During the 2004 to 2010 period, a major construction and investment boom took place in India. During that time I visited India (mainly Hyderabad and Mumbai) regularly for work and distinctly remember seeing the dense concentration of cranes and experiencing the hustle and bustle of construction workers at project sites everywhere we went. I have not had a chance to visit India since 2012, but I am afraid that many of these erstwhile construction projects remain incomplete, now-quiet reminders of this particularly insidious form of corruption.
India’s economy in 2016 is still dealing with the wounds of this type of corruption from that period of time. Bad projects left the banking system saddled with non-performing loans, which has made it very difficult to extend new loans despite the best efforts of the Modi government. It is also very telling that a disproportionate share of bad loans were extended by State banks, highlighting the linkage between political patronage and corrupt project sponsors. Until these banks are re-capitalized, things will continue to move forward at a relatively slow pace.
“Ghost Cities”
In China, my sense is that the largest absolute amount of corruption took place in the real estate sector. This was a direct result of China's Communist legacy where all property and real estate was owned by the state. As the country embraced Capitalism, policymakers had to figure out how to transfer property rights to the people. In urban areas, this task was relatively straightforward, as (in most cases) you simply transferred ownership of the apartment to the family living in it. However, out in the farming villages, results were quite mixed as land reform was often implemented at the village level.
If you were lucky, the person in charge was relatively fair and egalitarian. There was even a case (Huaxi) where the village’s assets were pooled together to start businesses and shares were distributed evenly amongst the resident villagers. Over time, these businesses prospered and the land became very valuable because the village sat on the outskirts of rapidly expanding Shanghai. Eventually, all of the villagers became fantastically wealthy from their shares and that is how it became famous. However, not all village officials were as competent/fair as Huaxi’s; today, most public protests are in some way related to the improper transfer of a village’s property rights.
In China, the most common method of corruption was for a project sponsor to conspire with a politically connected official on a development project. Converting farmland sitting on the outskirts of an emerging urban area is particularly profitable because farmland is owned by the village and farmers only hold usage rights. There was no consistent mechanism to price “usage rights” so depending on how greedy/corrupt the main actors are, one can coerce villagers to give up their rights to the land for a low price, develop it and then sell it as fully owned property. It is this arbitrage between the value of “rights to use” and fully owned property that leaves a lot of room for the project developer to extract his pound o' flesh. And if your village happened to sit next to a growing urban center, this arbitrage could be enormous.
Now a big difference between China and India is that a project generally needs to be completed in order for most of any ill-gotten gains to be realized. This is particularly true with residential developments that are ultimately sold to households, which until recently had been stuck with few attractive investment options for their savings. While there are certainly ways to siphon money out of a project during its construction phase, most of the ill-gotten profits are realized only when the project is successfully sold.
Furthermore, in China officials are judged and promoted based on getting things done. It’s easier and more profitable to finish one project and move on to the next one instead of siphoning all of the money out of the project and leaving it incomplete. Still bearing the Communist-era mindset with its focus on production, a string of unsuccessful projects is a pretty clear sign of incompetence within the party. And the last thing a corrupt official wants is a deeper investigation into his affairs that might yield clear evidence of corruption — especially because the penalty for major corruption is often death in China.
So unlike India, China does not suffer as much from projects being left incomplete on a massive scale. In fact, China's track record is nothing short of impressive in this regard, although some would argue that quality standards are not quite yet up to global standards.
Instead, you run into the opposite problem of over-construction. Over-building is harmful to society as well, but in different ways. Instead of parcel upon parcel of idle construction pits, you have entire projects that are not used or significantly under-utilized. Most people by now have heard of the rather popular meme about the massive “ghost cities” in China such as Kangbashi in Inner Mongolia:
While I would argue that the “ghost city” story was blown out of proportion, it does point in the right general direction. China’s main economic issue is the problem of largely debt-fueled over-construction and over-capacity across many industries, particularly those that are capital-intensive. Debt has grown rapidly as a percentage of China’s GDP in recent years and policymakers will have to deal with these in some way shape or form in the coming years. Most likely this will come in the form of sharply declining growth which we have already seen take place in recent years although that may not actually be a bad thing if you are no longer building things that you have no use for.
Both methods of corruption are bad, but ultimately I think that China’s form of industrial-scale corruption is more benign than India’s. That is to say, I think it is better to be in a situation of chronic over-investment vs. one of chronic under-investment. Having too many empty buildings is better than having half-constructed highways and construction projects that are never finished which are at best eyesores and in the worst cases, real negative externalities like what happened with the Kolkata flyover incident.
There is simply less of a burden on society to figure out how to deal with a completed (but empty) building as opposed to a construction pit that requires significant incremental investment to become even marginally useful. In the case of under-utilized but finished assets, the original equity and bondholders may see their capital wiped out but at some price point the asset can still be used in some form, allowing society to extract some benefit out of it. In bond lingo, the recovery ratio for finished assets is typically much higher than for incomplete ones because you will likely need to invest significant incremental capital just to get the incomplete project completed to have any hope of getting use out of it. And in many cases, it is better to just raze the half-completed project and start building from scratch.
Second-order coordination issues are another harmful effect of chronic under-investment and project overruns. Corruption that leads to stalled projects not only affects the banks that lent money to those projects, but may also impact earnest entrepreneurs (as well as their lenders) whose own investment projects depend on the completion of other projects. Building a factory in the middle of the country without a connection to the main highway renders it completely useless. And this happens a lot in India unfortunately.
Finally, there is the matter of how much is ultimately stolen from society. While it is again very difficult to get a holistic view given how much corruption likes to remain hidden, it is still instructive to take a look at specific instances to get a sense of how much (and more importantly, what percentage of the project) was taken by the corrupt sponsor. As mentioned earlier, in the case of Kingfisher Airlines, out of 7,000 crore in loans, banks were only able to recover 6 crore, or roughly one-tenth of 1% (implying a loss rate of over 99%!), which suggests that much of it was stolen by Mr. Mallya leaving almost nothing of value for society outside of a few empty metallic shells that really could only be sold for scrap value.
Turning to another high-profile case in China, ex-railway minister Liu Zhijun was convicted in 2013 of corruption and authorities ultimately seized personal assets measured in the hundreds of millions of U.S. dollars amassed over a decades-long career. While this is truly a massive sum of money in absolute terms, in relative terms it was actually quite small compared to the hundreds of billions of dollars that were invested in high-speed railways under his watch. In other words, the loss rate was less than one-tenth of 1% of the total invested amount. Incidentally this is actually a much lower percentage than things like: (i) typical option packages for CEOs in America, (ii) financing fees paid to investment bankers (this coming from a former banker!), and (iii) the percentage take that someone like Jay Gould garnered for his role in the construction of America’s transcontinental railroads in the late 19th century.
While this does not in any way justify his corrupt activities — at the very least, government officials should be held to much higher standards — it does put some proper context around it. In any case, Mr. Liu is now going to spend most of the remainder of his life in prison:
Finally, while Kingfisher left nothing but empty airplane shells, ordinary Chinese people get to benefit from the shorter travel times and generally more pleasant experiences that ultimately come from the country’s massive high-speed rail system. While these stories and anecdotes may not be necessarily be fully representative of India or China, I do believe they illustrate some of the differences between Chinese and Indian corruption as well as their respective impacts on society.
This was originally published on Quora in May 2016.