Economic Integration and Corruption: The Case of China∗

It is believed that economic integration, in terms of increasing flows of trade and foreign direct investment, contributes to lower the level of corruption in host countries because integration increases market competition and efficiency, reduces rents, and promotes the diffusion of good governance. However, such kind of argument ignores the interactions between economic integration and local political and economic environments. By focusing on China, I argue that economic integration that helps create higher rents which could possibly be shared between investors and government officials coupled with weak institutions to detect bribe payments, increases the level of corruption in China. To test this hypothesis, I adopt a within country research design and collect an original data to measure provincial level of corruption in China. Furthermore, I construct an instrument to deal with the reverse causality between economic integration and corruption. Finally, simulation and sensitivity analysis are used to evaluate the problems of measurement error, omitted variable bias and potential violation of exclusion restriction assumption in the IV estimation. Preliminary empirical results support my argument. ∗Paper prepared for the annual conference of International Political Economy Society in College Station, TX, Nov. 13-14, 2009. I’m grateful to the financial support from the Fund for Global Environment and Conflict Resolution. †Ph.D. Candidate, Department of Political Science, Columbia University, [email protected]. Economic Integration and Corruption: The Case of China