The Economic Impact of a Major Corruption Scandal in China: The Case of Heilongjiang

Abstract

In this paper, we exploit a unique event in the Chinese province of Heilongjiang. Seven high level officials were prosecuted for corruption as an unexpected consequence of an ordinary investigation in 2004. This event exposed a significant amount of corruption and resulted in a substantial anti-corruption initiative within the Heilongjiang province. We use the Synthetic Control Method (SCM) to investigate how this exposition influenced subsequent economic activity. We find that, following the 2004 scandal, GDP per-capita, investment, consumption, and net exports decreased relative to the counterfactual. Government spending, however, increased suggesting that the government may have been attempting to compensate for the negative economic fallout. While our results are only weakly significant, the persistent lack of subsequent economic growth following this massive anti-corruption initiative is an important finding.