Guanxi is defined as informal institutions which grants individuals certain privileges and obligations within relationships in virtue of being in particular social positions. Guanxi is very much an aspect of modern Chinese culture. It has received some considerable attention in the western press recently. Often it is portrayed inaccurately being used interchangeably with corruption. This is misleading.
Though it can lead to corruption (and often does), it is not actually corruption per se but a form of favoritism which exists in all societies to one degree or another. Favoritism confers privileges on people by those in positions of power not in virtue of merit but because of some other attribute such as friendship or family association. Corruption (such as bribery), on the other hand, is rather the use of one’s power to illegally or fraudulently confer privileges upon oneself or someone else. Corruption is usually far more serious. It is both illegal and one of the principle harms in many societies today especially developing societies such as in China. Guanxi can lead to corruption because obligations to confer favors to others can lead to the extending of illegal favors. Those who believe they owe a social or business debt to another may feel obliged to return the favor through extra legal means if legal actions are not available or too difficult to achieve. Thus successful efforts at curtailing corruption may need to examine the practice of guanxi.
Though guanxi is a form of favoritism, guanxi has a moral element. It is based on the notion of reciprocity. Privileges conferred are done so on the understanding and expectation of returned favors in the spirit of equality and mutual benefit. Usually this element is absent in other forms of favoritism (e.g. nepotism). Often other forms of favoritism confers advantages without much in expected returns other than perhaps a show of appreciation.
However, guanxi also conflicts with other values, values that China today desires. In order to build a truly modern and civil society, China must also be a meritocracy. But obligations to confer privileges on those merely in virtue of their past actions in the spirit of reciprocity often comes at the cost of alternatives that are more efficient economic exchanges. Often better and less costly solutions in many business transactions are forgone in favor of less favorable ones because of social obligations such as guanxi obligations. This has the effect of making society less meritocratic and more inefficient as a whole. Incentives for developing better and less costly goods and services are tied down by the obstructive social incentives of guanxi. But a true meritocracy basis business decisions on talent, and quality of product and service rather than social obligations.
So while guanxi has a decided moral flavor, it has its deficiencies too including an increased risk of corruption and wider social risks of reduced productivity and economic inefficiency.
While corruption, which must be mainly dealt with through a better, more efficient legal system, guanxi must be faced from a social/cultural perspective. This shouldn’t be a surprise because it is, in its essence, a social problem. Chinese people must begin to see the problems associated with guanxi. They must expect less of others in the form of returned business-related privileges from past dealings and not expect to return favors merely in virtue of past actions. They must treat business dealings more impersonally and as a matter of talent, quality and price rather than part of the dynamic of social relationships. Expecting a favor to be returned may put pressure on others to do what is not in their own or society’s best interest. In short, Chinese people must learn to separate business dealings with their personal relationships.
Embodying the values of objectivity and impersonality in our business and political relationships is the foundation of meritocracy. The element of reciprocity can still be preserved if the distinction between the personal and business is made salient through educating the public. People can still resort to other ways than returning business favors for like favors. Business lunches, parties and even business vacations are often ways used in many developed countries in business partnerships to celebrate and show appreciation for favorable business dealings which carry no expectations of returned business favors if future dealings are not suitable for all parties involved.
In the US there is the saying, “It’s just business,” meaning that you shouldn’t take it personally when business partners don’t return a good turn with another. There may be good reasons the favor isn’t returned, reasons that aren’t personal but strictly business related. It’s not only good for business but good for building a modern meritocracy.