Inclusive institutions and economic growth: comparative perspective and policy implications for China

This paper examines the empirical relationship between the presence of inclusive institutions and the pattern of economic growth in a cross-country setting. We find evidence that the presence of inclusive institutions, indicated by political democracy, positively affects consumption share. In turn, the increase of the latter in the preceding year is associated with a significantly higher rate of total factor productivity (TFP) growth. The link from democracy to TFP growth via consumption is stronger for countries of higher levels of income. These findings suggest that institutional inclusiveness may have become increasingly important for economic growth when the level of income rises. We also provide preliminary evidence that consumption may have facilitated productivity growth via the channels of increasing innovations and reducing social conflicts. The findings shed lights on the structural transformations toward a more inclusive and sustainable model of growth in China today.Abbreviations: FE: GMM: Generalized method of moments PWT: TFP: Total factor productivity