New Evidence on the Impact of Institutions on Economic Development in China

It is by now a well-established fact that good institutions are decisive for economic growth and development. However, only recently, the impact of this underlying growth driver has been investigated for probably the most striking economic success story of the last century: the Chinese economy. China presents a particularly interesting case study since it is often regarded as an exception by having achieved double-digit growth rates for several decades despite relatively low institutional quality. However, new empirical evidence indicates that within China, the picture is more nuanced and that institutional quality plays, in fact, an important role for the economic performance of a province. In our chapter, we add further arguments to this discussion by focusing on the government efficiency index as a proxy for institutional quality. Using 2SLS regression, we show that institutional quality has a highly significant positive impact on the provincial per capita income, trumping the remaining two deep determinants, integration and geography, which only have an indirect effect via institutions. Our results indicate that in order to sustain growth in the future and thus avoid a prolonged growth slowdown, policymakers should be more aware of this important growth driver which still has a large potential for generating growth in the provinces that are currently lacking behind in terms of institutional quality.