Article ID Journal Published Year Pages File Type
5047802 China Economic Review 2012 19 Pages PDF
Abstract

Corruption is one of the most pervasive obstacles to economic and social development. However, in the existing literature it appears that corruption seems to be less harmful in some countries than in others. The most striking examples are well known as the “East Asian paradox”: countries displaying exceptional growth records despite having thriving corruption cultures. The aim of this paper is to explain the high corruption but fast economic growth puzzle in China by providing firm-level evidence of the relation between corruption and growth and investigating how financial development influences the former relationship. Our empirical results show that corruption is likely to contribute to firms' growth. We further highlight the substitution relationship between corruption and financial development on firm growth. This means that corruption appears not to be a vital constraint on firm growth if financial markets are underdeveloped. However, pervasive corruption deters firm growth where there are more developed financial markets. This implies that fast firm growth will not be observed until a later stage of China's development when financial markets are well-functioning and corruption is under control. Furthermore, the substitution relationship exists in the private and state-owned firms. Geographically, similar results can be seen in the Southeast and Central regions.

► This paper provides a possible explanation for the corruption-growth puzzle in China. ► The evidence is addressed from the micro level survey data. ► Corruption is likely to contribute to firm growth, though the benefit is transitory. ► A substitution relationship exists between corruption and financial development. ► Similar results can be observed across types of ownership and regions.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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