Rent-Seeking is... Compatible with Growth?
Discussing Prof. Yuen Yuen Ang's research on fringe compensation of Chinese bureaucrats.
In her 2020 book, China's Gilded Age, Dr. Yuen Yuen Ang, Professor of Political Science at Johns Hopkins University, attempts to make sense of “the paradox of [China’s] economic boom and vast corruption” (fittingly, her book’s subtitle). Instead of adopting non-performance-based salary like Western bureaucracies, Prof. Ang finds that Chinese bureaucracies dual-track system in which public officials earn very little by way of formal wages.
As Figure 4.2 shows, the lion’s share of public employees’ earnings come from informal cash payments, from fees, fines, etc., and in-kind benefits, such as “free meals, free vacations, subsidized housing, entertainment budgets, and daily necessities such as food, electricity, and gas."1 A superficial analysis of such a payment system might lead naive game theorists to predict rampant short-term rent-seeking that completely inhibits medium- and long-run economic growth. Yet this does not describe development pattern witnessed in post-Mao China.
How is this possible?
Luckily for us, the brilliant Prof. Ang posits a persuasive answer: street-level bureaucrats implicitly balance short- and long-term gains from engaging in both predatory and developmental actions, respectively. Prof. Ang hypothesises that, “in the short term, agency collections raise bureaucratic compensation more than tax revenue… In the long term, however, tax revenue raises compensation more than agency collection.” Prof. Ang’s empirical findings justify her conjecture:
[In the short term] agency collection has the largest coefficient (20.21), compared with tax revenue (13.18) and fiscal transfers (4.51). This means that, consistently with H1, an increase in agency collections raises bureaucratic compensation more than tax revenue in the short term… In Table 4.2, [lagged] tax revenue posts a statistically significant and positive coefficient, whereas the coefficient for [lagged] agency collection is positive but not statistically significant. A unit increase in tax revenue registers a long-term effect of raising compensation by 33 Yuan, which, according to the ECM model, plays out over multiple time periods in percentages. Simply put, consistently with H2, these results indicate that expanding the formal tax base raises public compensation over the long term, but extracting fees and fines for one’s agency may not.”
In short, the coexistence of seemingly irreconcilable bureaucratic behavior—informal predation versus formal development—is explained by the bureaucrats themselves understanding the indefinite, repeated nature of the game they’re playing with firms, entrepreneurs, and private sector actors. The bureaucrats must attract and retain businesses from which to extract rents if they hope to mooch off of these profit-seekers for more than one period of the game, to put it cynically (read: realistically). Considering bureaucrats have the same lifespans as the rest of us, they do hope to balance immediate and future payoffs; they have a sufficiently high enough discount rate to refrain from sucking their tax base dry in period T(0) of the iterated game of Chinese development.
Ang, Yuen Yuen. China’s Gilded Age : the Paradox of Economic Boom and Vast Corruption. Cambridge: Cambridge University Press, 2020. 93.