The Consequences of Corruption: Evidences from China

45 Pages Posted: 24 Jun 2010

See all articles by Bin Dong

Bin Dong

Queensland University of Technology

Benno Torgler

Queensland University of Technology; CREMA; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: June 22, 2010

Abstract

With complementary Chinese data sets and alternative corruption measures, we explore the consequences of corruption. Adopting a novel approach we provide evidence that corruption can have both, positive and negative effects, on economic development. The overall impact of corruption might be the balance of the two simultaneous effects within a specific institutional environment (“grease the wheels” and “sand the wheels”). Corruption is observed to considerably increase income inequality in China. We also find that corruption strongly reduces tax revenue. Looking at things from an expenditure point of view we observe that corruption significantly decreases government spending on education, R&D and public health in China. We also observe that regional corruption significantly reduces inbound foreign direct investment in Chinese regions, which indicates that the pollution haven hypothesis may not hold in China. This finding sheds a new light on the “China puzzle” that China is the largest developing host of FDI while it is appears to be very corrupt. Finally we observe that corruption substantially aggravates pollution probably through loosening environment regulation, and that it modifies the effects of trade openness and FDI on the stringency of environmental policy in a manner opposite to that observed in literature to date.

Keywords: Corruption, China, Government, Economic Development, Inequality, Environment

JEL Classification: D720, H110, K420

Suggested Citation

Dong, Bin and Torgler, Benno, The Consequences of Corruption: Evidences from China (June 22, 2010). FEEM Working Paper No. 73.2010. Available at SSRN: https://ssrn.com/abstract=1628567 or http://dx.doi.org/10.2139/ssrn.1628567

Bin Dong

Queensland University of Technology ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Benno Torgler (Contact Author)

Queensland University of Technology ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

CREMA

Gellertstrasse 18
Basel
Zurich, CH 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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