Has China’s Anti-Corruption Campaign Slowed Down Growth?

Abstract

Conventional wisdom suggests that corruption has a negative effect on growth although the mechanisms are subject to debate. We take an alternate approach to challenge this wisdom by testing the economic effects of anti-corruption measures. Using panel data (1999-2016) from 31 provinces in China and difference-in-difference estimation, we find that President Xi Jinping’s anti-corruption campaign is associated with an average 1.3% drop in the real growth rates of provinces, controlling for relevant variables. We speculate that the fierce anti-corruption campaign has made local officials cautious in committing to public investments, the main driver of growth in China in recent years, and has also undermined investor confidence and deterred private investment which would further drag down China’s economic growth. The effect is stronger for higher-income and more industrialized provinces. The result is robust to different model specifications. Our findings support the greasing-the-wheels hypothesis about corruption.