D Murali

Ruses of a shadow economy

D. Murali | Updated on September 17, 2011


Wheeling and dealing is one of the chapters in Frank Dikötter's Mao's Great Famine: The history of China's most devastating catastrophe, 1958-1962 ( Penguin). It opens by describing the widespread rot, with virtually everybody, irrespective of position in the social hierarchy, subverting the system of distribution. “As famine developed, the survival of an ordinary person came increasingly to depend on the ability to lie, charm, hide, steal, cheat, pilfer, forage, smuggle, slack, trick, manipulate or otherwise outwit the state.”

Social networks

No one could navigate the economy on one's own, the author notes. He explains that, in a nation of gatekeepers, obstacles were everywhere, as anybody could obstruct anybody else, from the cantankerous caretaker in an apartment block to the dour ticket seller behind the window in a railway station. So prolific and complex were the rules and regulations that ran through the system that discretionary and potentially tyrannical power was vested even in the lowliest of bureau functionaries, he adds. “Petty power corrupted petty people, who proliferated at the lower levels of the planned economy, making arbitrary and capricious decisions over goods and services in short supply which they happened to control. And higher up the chain of command, the greater the power ,the more dangerous the abuse.”

Personal contacts and social connections were necessary to get even the simplest things done, one learns. Any connection was okay, be it a former neighbour, an erstwhile colleague, a school friend or even a friend of a friend. For what? “To accommodate a request, turn a blind eye, skirt the law or bend a rule. In the higher reaches of power, influential colleagues could help one to secure state funds, avoid paying taxes or gain access to scarce resources.” At every level, therefore, people expanded their social network by trading favours, exchanging gifts, and paying bribes, Dikötter narrates. He observes that the planned economy, with its dedication to the greater good, spawned a system in which the individual and his personal network prevailed.

Entrepreneurial guiles

Understandably, the people in the party were in a better position to use the system for their own personal benefit than the common man, and they showed endless entrepreneurial guile in devising ways to defraud the state, the book informs. An example mentioned is of how enterprises bypassed the plan and traded directly between themselves.

“In Wuhan, the Provincial Highway Transportation Bureau agreed to move goods for the Jianghan District Number Two Commercial Office in exchange for food. The operation was worth well over a tonne of sugar, a tonne of alcohol and a thousand cartons of cigarettes as well as 350 kilos of canned meat in the first months of 1960. The Wuhan Oil Purchasing Station, on the other hand, traded hundreds of tonnes of oil, gas and coal to provision lavish banquets for its cadres.” Other such barter examples include the Qinghe Forestry Bureau giving hundreds of cubic metres of timber for biscuits and lemonade from a factory in Jiamusi; and the exchange of pigs for cement, or steel.

At the ground level, though, a lot of legwork was necessary. Travelling representatives helped create a parallel economy throughout the country by identifying opportunities to circumnavigate the rigid supply system; and the purchasing agents built up social contacts, wining and dining local officials, and traded their way through a sopping list provided by the enterprise for which they were working, as Dikötter chronicles.

“The director of the Bureau for Goods and Materials in Shanghai regularly received presents, from deer antlers rich in velvet to white sugar, biscuits and lamb. More than 6 million yuan in goods were ‘damaged' or ‘lost' under his auspices in less than a year.” People's communes, too, were in the game. An example the author gives is about the Seagull Farm in Guangdong selling some 27 tonnes of citronella oil to a Shanghai perfume factory, rather than deliver to the state.

Accounting assistance

Creative accounting came handy to remain invisible despite cannibalising state structures, shadowing the planned economy, and moving things along a nationwide network. One instance reported in the book is of turning goods into ‘currency' as at a dumpling shop in Shenyang, thus: “The Municipal Aquatic Products Company, suffering as much as any other distributor from severe shortages in the midst of famine, handed over its entire supply of shrimps, normally earmarked for consumers in the suburbs, to the shop for the promise of dumplings. The cadres went on shopping sprees in the best department stores in Shenyang, paying with dumpling coupons… Even services such as delivery of coal, water supply, toilet cleaning and hygiene inspections were all carried out against an agreed amount of the shop's speciality.”

The bean-counters helped also with the hiding of misappropriation. How? By inventing expenditures which were never incurred, in some cases claiming funds up to a million yuan! More audaciously, state investments were moved away from industry towards fixed capital, as state units treated themselves to new buildings, dance halls, private toilets and elevators, the book states.

Examples of ‘creativity' that can make you fall off the chair include the adding of administrative and operating expenses to the production costs (“In Beijing alone some 700 administrative units, complete with salaries and expenses, thus vanished into a black hole called ‘production'”); and the disguise of other costs to pass them on to the state (“In Luoyang, Henan province, a ball-bearing factory built a 1,250-cubic-metre swimming pool, sending the bill up as a ‘heat lowering device'”).

Taxes unpaid

Less sophisticated than these ploys were methods such as the endless borrowing from state banks, and the stopping of tax-paying. Dikötter speaks of how the Finance Department and the Trade Department of Liaoning province dictated that profits from enterprises under their control should be removed from the budget and distributed locally instead.

“Losses, on the other hand were entered into the budget and billed to the state. Not only did collective enterprises and urban communes routinely fail to raise taxes, but entire cities decided to forgo tax collection.”

Organised pilferage happened in a big way. Local factories along the Shanghai-Nanjing railway line pilfered, embezzled or smuggled well over 300 tonnes of steel, 600 tonnes of cement and 200 square metres of timber in less than a year, the author recounts. “The New China Lock Factory from Xuzhou, for instance, hired a lorry systematically to steal all the material it needed from railway depots. Most of these activities were directed by top cadres. A large assembly hall in Nanjing East Station, entirely built from stolen material under the direction of station manager Du Chengliang, was a monument to organised theft…”

Let's hope our own netas do not read this book to borrow an idea or two for practising here.

SMS your comments about Taxation page to 94449 07996

Published on September 03, 2011

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor