Demarketization and Corruption in China: Evidence from a Quasi-Experiment

Although corruption persists in the process of marketization in transitional economies, there is still a lack of sufficient evidence on the exact causal effects and mechanisms of demarketization on corruption. As an external shock, the Global Financial Crisis presents an opportunity for a quasi-experiment that allows for the differentiation of declining levels of marketization between China’s developed coastal areas and other areas. This article aims to empirically examine the relationship between demarketization and provincial corruption levels in China, combining an instrumental variable method with a synthetic control approach. The study reveals that foreign direct investment outflow leads to a substantial decline in corruption levels by decreasing rent-seeking opportunities. These findings provide robust evidence to support the negative causal relationship between demarketization and corruption in transitional economies, where marketization alone cannot effectively curb corruption in the presence of a dual-track economy.