A Study On The Economic Growth Effect Of Financial Openness Under Corruption

Financial reform and anti-corruption are the major issues of the current work of China, and its influence would absolutely affect the performance of the economic growth. The establishment of the four free trade zones is an ambitious attempt for stimulating the further smooth economic growth, these FTZs will play the pivotal role in China’s hyper financial reform for they are the experimental fields of new exploratory policies. The "policy support" which the FTZs receive from the government denotes definitely that the government is trying to promote deeper open-up by implementing more intensive reforms. Capital account liberalization is not only an important manifestation of the deep-seated financial liberalization, but also the important direction and the inevitable action of a hyper level financial reform, moreover, it is a necessary step towards the internationalization of RMB. However, what’s unfortunate is, scholars in this field have different views on financial liberalization and its effects on economic growth. The recent findings in this field indicate that there exists "threshold" effect and path dependence in the effects of financial openness on economic growth, which means that the performance of financial openness on economic growth is inevitably depends on macro-economic policies, legal environment and the maturity of financial system, it’s more complex when especially, considering the influence of corruption. In views of the above issues and the current focus of the authority-financial reform and anti-corruption movement, this paper analyze the effects of financial openness on economics with corruption taken into account, the contribution of this paper is not only an expansion of the relevant researches but also, it provides valuable proposals to achieve positive economic effects of financial openness under the impacts of corruption.On the basis of previous researches, the main contributions of this paper are as follows:1. Forming a theoretical model including 3 parties:social individuals, representative manufacturers and potential corrupt government, the movement of these three parties achieve an equilibrium as they maximize their own goals, and the difference of economic growth was analyzed as whether the financial liberalization was enacted.2. Applying annual data of 108 countries and system GMM technology to perform a dynamic panel data regression, the validity of the former theoretical conclusion was proved, and moreover, the robustness of the empirical model was tested.3. The sample used in this paper contains more than 100 countries from all over the world, and the different effects of financial openness were analyzed as there were different impacts from the varying level of corruption, on the basis of this general conclusion, combined with China’s current financial reform in the FTZs and anti-corruption movement, this paper attempts to provide valuable recommendations on achieving the positive economic effects of financial openness and meanwhile, avoiding risks may be incurred by the financial reform.This paper investigates, both theoretically and empirically, how the negative effect of government corruption on economic growth is magnified or reduced by capital account liberalization. In chapter 3, the theoretical model shows that highly corrupt countries impose higher tax rates than do less corrupt countries, thereby magnifying the negative impact of government corruption on economic growth in highly corrupt countries and reducing the impact in less corrupt countries if financial openness is enacted. Empirical evidence obtained from an analysis of panel data collected from 108 countries is consistent with our theoretical predictions, namely the interaction term of government corruption and financial openness has a significant and negative impact on economic growth, implying that financial openness magnifies the negative effect of government corruption on economic growth.