The evolution of corruption and development in transitional economies: Evidence from China

• Published in: Economic modelling 2019-12, Vol.83, p.346-363
• Main Authors: Chan, Kenneth S., Dang, Vinh Q.T., Li, Tingting
• Format: Article
• Language: English
• Subjects: China; Corruption; Development
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2019.09.001

It is widely accepted in the literature, that the level of corruption is negatively and robustly related to economic development. However, skeptics argue that for transitional economies, this relationship may not hold. Economic reform loosens up the control of local officials and can increase corruption; Corruption and per capita income can be positively related. Using panel provincial data of China from 1995 to 2014 on prosecuted cases of corruption, we discover that during the early phase of China’s economic reform (during Zhu Rongji and Hu-Wen administrations), a positive short-run relationship is indeed observed. But, there is a robust negative long-run cointegration relationship between corruption and per capita income. The development of the market economy improves private wage and income in the long-run. The relatively inefficient and low returns to ordinary corruption cannot compete with rising market returns, which lead to dwindling corruption. However, the share of major corruption cases is increasing over time to be able to compete with rising market wages. •This paper use China’s provincial data on prosecuted cases of corruption, 1995–2014.•A negative long-run relationship between per capita income and corruption in China is found.•But, in the early reform period of China, a positive short-run relationship is observed.•The long-run improved market returns lower the gain and cases of ordinary/petty corruption.•But, the sumptuous stark corruption cases are increasing with rising market returns.