Bin Dong Thesis - QUT

1 THE causes AND consequences OF corruption A Thesis PRESENTED IN FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN ECONOMICS March 2011 BIN DONG School of Economics and Finance Faculty of Business Queensland University of Technology Gardens Point Campus Brisbane Australia i Acknowledgements I would like to express my gratitude to my principal supervisor Professor Benno Torgler, for walking me through the journey of PhD study and for being there at every step as a source of inspiration, motivation and moral support.

2 Professor Torgler s excellent supervision, invaluable guidance, suggestions, corrections and empirical skills have helped shape much of this Thesis . I would also like to extend deepest appreciation to my associate supervisor Professor Uwe Dulleck for his invaluable guidance and encouragement throughout this study. I extend my thanks to Dr. David Johnston for offering invaluable comments and suggestions for empirical analysis. I also extend special thanks to the members of the administrative staff of the School of Economics and Finance.

3 I am extremely grateful to China Scholarship Council and Queensland University of technology for jointly providing me the financial support for my PhD study. I am deeply indebted to my wife Jin Kang, who has been the motivational force in my life, and thank her for her patience, understanding and invaluable support during the PhD study. I am grateful to my mother, brother for their selfless and unreserved support over the years. Finally I would like to thank Ms Ying Zhou, Mr Tony Beatton and Mr Markus Schaffner for their assistance and support.

4 Iii Abstract This Thesis comprehensively studies the causes and consequences of corruption in both cross-country and within-country contexts, mainly focusing on China. The Thesis commences by extensively investigating the causes of corruption . Using the standard economic approach, this study finds that in China regions with more anti- corruption efforts, higher education attainment, Anglo-American historic influence, higher openness, more access to media, higher relative wages of government employees, and a greater representation of women in legislature are markedly less corrupt; while the social heterogeneity, deregulation and abundance of resources, substantially breed regional corruption .

5 Moreover, fiscal decentralization is discovered to depress corruption significantly. This study also observes a positive relationship between corruption and the economic development in current China that is mainly driven by the transition to a market economy. Focusing on the influence of political institutions on corruption , the Thesis then provides evidence that a high level of political interest helps to reduce corruption within a society, while the effect of democracy upon corruption depends on property rights protection and income distribution.

6 With the social economic approach, however, the Thesis presents both cross-country and within-country evidence that the social interaction plays an important role in determining corruption . The Thesis then continues by comprehensively evaluating the consequences of corruption in China. The study provides evidence that corruption can simultaneously have both positive and negative effects on economic development. And it also observes that corruption considerably increases the income inequality in China.

7 Furthermore this study finds that corruption in China significantly distorts public expenditures. Local corruption is also observed to substantially reduce FDI in Chinese regions. Finally the study documents that corruption substantially aggravates pollution probably through a loosening of the environmental regulation, and that it also modifies the effects of trade openness and FDI on the stringency of environmental policy. Overall, this Thesis adds to the current literature by a number of novel findings concerning both the causes and the consequences of corruption .

8 Key Words: corruption , causes , consequences , China, democracy, social interaction, political interest, economic development. iv Table of Contents Acknowledgements .. i Statement of Original Authorship .. ii Abstract .. iii Table of Contents .. iv List of Tables .. vii List of Figures .. ix Chapter One Introduction .. 1 Motivation of Thesis .. 1 Content of Thesis .. 2 causes of corruption .. 2 consequences of corruption .. 7 Methodology issues .. 8 Structure of Thesis .. 10 Chapter Two Economic Determinants of corruption : Chinese Evidence.

9 12 Introduction .. 12 Determinants of corruption .. 15 Empirical Analysis .. 18 Province level Analysis .. 20 City level Analysis .. 35 Conclusion .. 38 Appendix .. 41 Chapter Three Political Interest and corruption : Cross country Evidence .. 44 Introduction .. 44 Political Interest .. 45 Theoretical Considerations .. 45 A Simple Model .. 46 Data .. 48 Dependent Variables .. 48 Measuring Political Interest .. 50 Further Independent Variables .. 51 Empirical Evidence .. 56 International Evidence .. 57 v Within Country Evidence.

10 70 Conclusion .. 71 Chapter Four Democracy and corruption : Cross country Evidence .. 73 Introduction .. 73 Theoretical Model .. 75 Model .. 76 Economic Equilibrium .. 77 Political Equilibrium .. 78 Empirical Evidence .. 80 Methodology and Data .. 81 Results .. 85 Conclusion .. 92 Appendix .. 93 Chapter Five Social interaction and corruption : Cross country Evidence .. 94 Introduction .. 94 Theoretical Foundation .. 96 Background of the Model .. 98 A Simple Game .. 100 Dynamics .. 102 Conditional corruption Discussion and Extensions.