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The role of institutional quality and human capital for economic growth across Chinese provinces – a dynamic panel data approach
Abstract
There is an ongoing debate within the economic growth and development literature whether institutions or human capital are more important for economic growth. We add further arguments to this discussion by focusing on a particular country, namely China. China is an interesting case study since it is often regarded as an exception by having achieved miraculous growth for more than three decades despite relatively low institutional quality. We employ a dynamic panel data model to analyze the role of improvements in institutional quality and human capital accumulation for the economic success of a province in China over the period 2003 to 2007. Using system GMM estimation, we find that while growth in human capital fosters economic growth all over China, only coastal provinces record a positive effect of institutional improvements on the growth rate of per capita income.
... This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). organization while simultaneously encouraging individuals to acquire more of these credentials to obtain a high-paying job, greater recognition, and more significant incentives (Chen et al., 2022;Glawe and Wagner, 2020;Ng and Feldman, 2010). Even the antecedents of the human capital theory argue that individual variables are the most significant predictors of compensation within an organization (Carpenter et al., 2001;Combs and Skill, 2003;Buck et al., 2008;Grimpe et al., 2019;Chowdhury and Schulz, 2022). ...
India’s young and dynamic workforce is a boon to the economy, but the challenge of high employee turnover looms large. Tosustain viability and attract top talent, organizations must prioritize the well-being and growth of their workforce. Providingopportunities for development and nurturing emerging talent ensures a continuous influx of fresh ideas. To retain employeeswho value fair remuneration, organizations must devise a comprehensive compensation strategy aligned with market trendsand employee expectations. In the cut-throat business world, attracting and retaining top talent is a crucial differentiator, andcompanies must adapt to the evolving needs of their employees to provide an environment that fosters growth, innovation, andjob satisfaction. The present study aims to apply five distinct machine learning algorithms to a sample of 1,170 IT workers from 61enterprises in the NCR region to investigate the human capital characteristics that influence remuneration in Indian IT companies.The study’s results indicate that the Random Forest model performed better than other models in predicting IT compensationbased on the selected performance metric. Specifically, the study highlights experience, the candidate’s alma mater, education,and the individual’s skill set as the most significant predictors of compensation design. The study has noteworthy implicationsfor job seekers and firms seeking to attract top talent. However, the present research could not utilize a deep learning model dueto a lack of data, and future research could investigate institutional factors. Finally, four agendas have been outlined to provideadditional direction for future research in this area
... Likewise, Hamdan et al. (2020) and Maneejuk and Yamaka (2021) use education spending as a measure of human capital, which has a significant boost to the Chinese economy. Moreover, Glawe and Wagner (2020) While studies using educational quality and systems as a measure of human capital, such as Glawe and Wagner (2020), using GMM estimates and the 2003-2007 data period, show that institutional quality as a measure of human capital has a significant positive impact on the Chinese economy. Likewise, Agasisti et al. (2021) used GMM estimators to explore the link between the efficiency of the Russian regional higher education system as a proxy for human capital and the speed of regional economic development from 2012 to 2015. ...
China's domestic labor market has limited demand for tertiary graduates due to an unbalanced industrial structure, with a weak contribution to economic performance over the past decade. This study estimates the asymmetric effects of higher education progress (highly educated employed workforce), higher education utilization (highly educated unemployed workforce), and the separate effects of higher education utilization interactions with high-tech industries on economic growth in China from 1980 to 2020. Using a Nonlinear Autoregressive Distributed Lag (NARDL) model, this study finds that the expansion of higher education progress (the employed workforce with higher education) promotes economic growth, while contraction of higher education progress (employed workforce with higher education) reduces economic growth. Likewise, an increase in higher education utilization (the unemployed labor force with higher education) suppresses economic growth, while a decline in the higher education utilization (the unemployed labor force with higher education) promotes economic growth. The study also found that the expansion of high-tech industries and government spending on education significantly stimulate economic growth. The moderating role of higher education utilization (unemployed labor force with higher education) in the impact of high-tech industries on economic growth is significantly positive. This study strategically proposes that China's higher-educated unemployed labor force can be adjusted to high-tech industries, which need to be developed equally in all regions. Moreover, the country is required to invest more in higher education and the development of high technological industries across all regions, thus may lead to higher economic growth.
... 74,75 A substantial strand of empirical evidence is in favor of explicitly incorporating human capital as an additional variable driving the multi-factor productivity in the Solow 76 residual with a little variation due to "institutional view" versus "human capital view". 77 Nonetheless, the nexus between human capital and economic growth is not quite straightforward. Siddiqui and Rehman 78 posited the positive impact of human capital on economic growth in the South Asian region while Nwani 79 asserted a negative relationship using the system GMM estimator. ...
Green growth is recognized as an adequate mechanism to decelerate environmental turmoil. However, empirical evidence on what determines sustainable economic growth is still underexplored. Apprehending the importance of financial liberalization, human capital, and militarization in the South Asian region, we investigate their short- and long-run effects on green growth using data from 1990 to 2017. To address the cross-sectional dependency (CD) and heterogeneity issue, second-generation cointegration estimation techniques are employed. The findings show a stable and long-run relationship between financial liberalization, human capital, military expenditures, and green growth. The results of CS-ARDL also show the positive long-run effect of financial liberalization and human capital while the negative effect of militarization on green growth. Nonetheless, the interaction effects show the darker side of human capital and the brighter side of militarization in the presence of more financial openness. Results were further validated using the Augmented Mean Group (AMG) and Dumitrescu-Hurlin Granger causality test, highlighting the need to optimally utilize military expenditures, financial liberalization, and human capital for the sustainable growth of the region.
... At least that is what China's experience over the past 40 years seems to suggest (see, e.g. Glawe & Wagner, 2019, 2020b. ...
Trilemma situations, which have long been the subject of lively discussion in economics in many fields, indicate risks of instability and unsustainability. This article shows that China has also been facing a political-economy trilemma (and thus the ongoing danger of unsustainability of its development strategies) for 70 years now and has reacted differently to it in different eras. The article distinguishes three epochs: the Mao era (1949–1978), the Deng era (1979–2011), and the Xi era (2012–). It argues that in all three epochs basically the same main objectives were pursued (economic growth/convergence; stability; and the maintenance of a one-party communist rule system), but with different priorities and with different instruments. It is shown that the Mao- as well as the Deng-development strategies related to these goals ultimately failed due to increasing systemic imbalances. Now the question arises whether the Xi strategy, which relies on partly new instruments, namely the nationalism map, the BRI program and digital surveillance, will be better able to control the unsustainability threat hidden in the trilemma. In addition, the article discusses possible strategy alternatives to overcome the trilemma problem.
As long as the Chinese economy moves to the forefront in the world, it’s becoming increasingly important to improve the methodology for analyzing its development as well as to identify drivers of its growth. The paper provides a statistical analysis of dynamics of the main indicators characterizing the scientific sphere of the country in 2005–2019: number of R&D personnel; gross domestic expenditures on R&D; patent and publication activities of Chinese scientists. In addition, the relationship between the size of the country's GDP and its high-tech exports was analyzed. For the purpose of studying the indicators in their dynamics a regression analysis based on the Chinese official statistical data was carried out.
The paper also presents a forecast of the scale and effectiveness of the China's scientific activity for the period 2022–2024 according to which, while maintaining the existing trends in the development of science and the economy, an increase in the volume of domestic expenditures on R&D is expected in 2024 (more than 3.284 trillion yuan) as well as in the number of issued patents (more than 537 thousand) and in the number of published scientific articles (more than 2.22 million). The carried-out analysis showed the existence of a close relationship between the country's economic growth and the dynamics of its exports of high-tech products. According to the forecast, while maintaining the existing trends in the development of the economy and high-tech exports, the projected values of Chinese GDP are in 2022 – 18.6 trillion US dollars, in 2023 – 20.3 trillion, and in 2024 – 21.7 trillion US dollars.
The results of the study showed that China's rapid economic growth was driven by both large-scale capital investments, high rates of increase in labor productivity, and the successful development of science and innovation in all strategic sectors of the economy. The exponential and parabolic growth of almost all key indicators characterizing personnel and financial components of the research sphere, patent, and publication activities, makes it possible to draw a conclusion on strengthening the leadership in the economic position of the People's Republic of China in the world and increasing its scientific potential.
This study determined the impacts of non-renewable and renewable energy consumption on natural resource productivity alongside human capital and technology transfer roles for 40 selected developing economies. The study relied on a dataset sourced between 1991 and 2021. The study applied the novel method of moments quantile regression (MMQREG) procedure for the analyses while ensuring inferential robustness through the fully modified ordinary least squares (FMOLS), dynamic OLS (DOLS), and Driscoll-Kraay (D-K) methods. Empirically, the study revealed that an increase in brown energy consumption exhausted resource productivity from the lower to the upper quantiles. In contrast, green energy utilisation enhanced resource productivity from the lower to the higher quantiles. Also, while human capital adversely affected resource productivity for both energy means, technology transfer positively impacted it from the lower to the upper quantiles. Likewise, inferences from the DOLS, FMOLS, and D-K techniques revealed similar findings. However, despite non-renewable energy being the dominant means of energy in these developing economies, the size of its adverse impact on resource productivity falls short of the increasing effect of renewable energy across all quantiles. Also, the magnitude of the negative impact of human capital on resource productivity is marginally more substantial with non-renewable energy. In contrast, the robustness of the enhancing impact of technology transfer is slightly more with renewable energy.
JEL Classification: O47, Q2, Q32.
This study determined the impacts of non-renewable and renewable energy consumption on natural resource productivity alongside human capital and technology transfer roles for 40 selected developing economies. The study relied on a dataset sourced between 1991 and 2021. The study applied the novel method of moments quantile regression (MMQREG) procedure for the analyses while ensuring inferential robustness through the fully modified ordinary least squares (FMOLS), dynamic OLS (DOLS), and Driscoll-Kraay (D-K) methods. Empirically, the study revealed that an increase in brown energy consumption exhausted resource productivity from the lower to the upper quantiles. In contrast, green energy utilisation enhanced resource productivity from the lower to the higher quantiles. Also, while human capital adversely affected resource productivity for both energy means, technology transfer positively impacted it from the lower to the upper quantiles. Likewise, inferences from the DOLS, FMOLS, and D-K techniques revealed similar findings. However, despite non-renewable energy being the dominant means of energy in these developing economies, the size of its adverse impact on resource productivity falls short of the increasing effect of renewable energy across all quantiles. Also, the magnitude of the negative impact of human capital on resource productivity is marginally more substantial with non-renewable energy. In contrast, the robustness of the enhancing impact of technology transfer is slightly more with renewable energy.
JEL Classification: O47, Q2, Q32.
This paper investigates the human capital convergence dynamics within China over the period 1985–2018 using a nonlinear dynamic factor model. Our results indicate that there exist multiple human capital clubs, and the heterogeneity between those clusters is increasing over time. Moreover, we detect a core–periphery division with several provinces located in Western, Northeastern, and Southern China being located in lower human capital clubs. Population and transportation density as well as the initial level of human capital appear to be most decisive for determining whether a province is on a high or low human capital development trajectory.
Provincial Competitiveness Index (PCI) survey data and government economic data from Vietnam are used to examine the relationship between economic growth and two indicators of governance effectiveness: efficacy at working with central law and creativity in solving business problems. Examining all of Vietnam's 63 provinces over 11 years (2007 to 2017), this study's fixed-effects regression analysis finds a significant association between economic growth and both measures of governance effectiveness, with a stronger magnitude for more industrialised provinces. This finding suggests that efforts to improve governance effectiveness and creativity in less industrialised provinces may fail to have desired economic impacts, pointing to deeper structural constraints. This article concludes by discussing implications for policy content and administrative reform.
While institutions are said to be poor in China in cross-country comparison, recent research indicates that at the provincial level, institutional quality plays in fact an important role for the economic success of a province, municipality, or autonomous region in China. Our paper aims to add further arguments to this discussion by focusing on the concept of club convergence. In particular, we analyze whether institutional quality in low-income provincial level administrative divisions converges to the level experienced by relatively highly developed ones or whether there exist multiple institutional clubs over the period 1997–2007 by using the log t test proposed by Phillips and Sul (Econometrica 75(6):1771–1855, 2007). Our findings indicate that there exist multiple institutional clubs within China, three rather small clubs which follow an above-average high institutional quality path and two clubs which find themselves on a relatively low institutional quality path and which together account for the majority of provinces and autonomous regions. Using the same methodology, we find that various members of the poor institutional clubs are additionally caught in a low-income trap. In a next step, we analyze the causal relationship between poor institutional traps and low-income traps in China by using a recursive bivariate probit model. We find evidence that institutional traps are important determinants of income traps, giving rise to the recently identified phenomenon of a ‘double trap’. Finally, our findings indicate that human capital and urbanization are additional important determinants of income traps, while globalization is decisive for avoiding poor institutional traps.
The aim of the study. Federal target program “Research and development in priority areas of development of the scientific and technological complex of Russia for 2014-2021” defines transport and space systems as a priority area of strategic importance for the country’s economy. The aim of the work is to study the state of research and development in the field of study and development of transport and space systems based on performance analysis, as well as to compare the effectiveness of scientific activities of educational organizations of higher education and scientific organizations in this area. Materials and methods . The information base of the study was statistical data and analytical information reflecting the state of research and development in the field of study and development of transport and space systems. The methodological base of the study is statistical methods of information analysis: analysis of variance, testing of statistical hypotheses, non-parametric criteria for comparing samples, analysis of time series, structural analysis. Results and discussion . The article reflects the results of the Institute for the Study of Science of the Russian Academy of Sciences monitoring the scientific potential of organizations conducting research and development in the priority area of scientific and technological development “Connectedness of the territory of the Russian Federation through the creation of intelligent transport and telecommunication systems, as well as the occupation and retention of leadership positions in the creation of international transport and logistics systems, the development and use of outer space and air space, the World Ocean, the Arctic and Antarctic”. This publication, in particular, analyzes the effectiveness of research and development in the priority area “Transport and space systems”.As a result of the analysis, conclusions were drawn about the main directions and trends of research and development in the field of studying and developing transport and space systems in Russia for the period 2015-2019. With the help of methods of dispersion analysis, nonparametric criteria, etc., a comparison was made of the effectiveness of scientific activity of educational organizations of higher education and scientific organizations.The analysis showed that international publishing analytical systems occupy a greater weight in the volume of publications compared to the Russian Science Citation Index (RSCI).Researchers of educational organizations of higher education have 5 times more publications than employees of scientific organizations, which can be explained by overestimated requirements for positions of faculty and the formation of “garbage” articles. In terms of citation, 2017 was the most successful year for Russian researchers in the field of transport and space systems. At the same time, the citation of researchers from educational organizations was 3-3.5 times higher in international publications and twice as high in RSCI publications. Scientific organizations in the field of scientific, design, technological works show much greater effectiveness and efficiency compared to educational institutions of higher education. For the period 2015-2019 a trend towards a decrease in the results of intellectual activity was revealed for all organizations under consideration.The analysis also showed the low performance of small innovative enterprises in this priority area for the period 2015-2019. In Russia, they have not received proper development. Dispersion analysis, testing of statistical hypotheses using nonparametric methods made it possible to compare the results of the activities of scientific organizations and organizations of higher education. Conclusions . Thus, one of the ways to increase the efficiency and effectiveness of science in Russia can be attributed to the revival of the system of research institutes, the activities of which would be aimed at meeting the specific scientific needs of the state.
This chapter compares the development processes in Japan, South Korea and China presented in detail in the previous chapters. Glawe and Wagner first identify the commonalities in the development of the three countries and elaborate on whether these commonalities justify speaking of a special “East Asian development model”. In order to come to a balanced judgment, the authors also work out in detail the manifold differences between the three countries and their development strategies, including the different starting levels at the beginning of reforms after World War II, the varying driving forces of development, the different political and economic systems, the different strategies regarding the adoption of foreign technologies, as well as differences in the culture, size, geography, institutions, economic/industrial policies, breaks in the development processes, and inequality.
The article examines the impact of the quality of the institutional environment on the development of the real and financial sectors of the economy. To assess the formation of the institutional environment, a set of qualitative and quantitative indicators was used. As indicators for assessing the development of the financial sector, it is proposed to use indicators of financial depth. Based on the use of correlation analysis tools, correlations between indicators of financial depth and indicators for assessing the formation of the institutional environment were identified. Based on the identified most significant correlations, taking into account institutional factors, diagnostic models were constructed, the use of which allowed us to build three forecast scenarios for changes in the financial depth of the Chinese financial system for the period up to 2030: optimistic, optimistic and basic. Arguments are presented that prove the weakness of the institutional environment of the Chinese economy, not only in comparison with the most developed economies, but also in emerging markets due to the preservation of certain characteristics of the transition economy, which hinders the development of the financial sector and market mechanisms. It is revealed that in the short term, further expansion of state participation in the Chinese financial market in a weak institutional environment may have a positive effect, but in the long term, an increase in state presence may become an obstacle to institutional development. Testing of the proposed tools of correlation analysis on the materials of the United States showed that indicators of the financial depth of the financial systems of developed countries with a high level of development of institutions have much weaker correlations with indicators of the formation of the institutional environment than in countries with emerging markets characterized by low quality of institutions.
The differences in human capital stock among regions in China have been widening since the mid-1990s, and regional marketization level is a possible determinant of human capital accumulation. Combining a nationwide survey data set at the individual level with more than 40,000 observations and an index of marketization for each province, we find a positive relation between marketization level and individuals’ years of schooling. Moreover, regional marketization levels, in the long run, using instrumental variables estimation can explain about 53% of the differences in average years of schooling among provinces. The findings suggest that a better market environment encourages human capital accumulation, which is an important condition for regional economic prosperity.
Gelişmekte olan ülkelerde küreselleşmenin yarattığı fırsat ve riskler farklı boyutlarla değerlendirilebilecek geniş bir kapsama sahiptir. Son otuz yıllık dönemde neoliberal küreselleşmenin getirdiği serbestleşme eğilimleri dikkate alındığında ticaretin, sermayenin ve emeğin mobilizasyonu beşeri kalkınmayı da yakından etkilemektedir. Günümüzün değişen dünyasında bireylerin eğitim, sağlık ve kültür gibi beşeri sermaye unsurlarının iyileştirilmesine yönelik talepleri artarken çok uluslu şirketlerin de nitelikli işgücü ihtiyacı artış göstermektedir. Bu doğrultuda mevcut çalışmada, küreselleşme ile beşeri sermaye arasındaki ilişki, küresel ekonomide önemli atılım yapan BRICS-T (Brezilya, Rusya, Hindistan, Çin, Güney Afrika ve Türkiye) ülkeleri için incelenmiştir. 1992-2017 dönemi periyoduna ait verilerle yapılan analiz sonuçları, küreselleşmenin beşeri sermaye üzerinde negatif; ekonomik büyüme, doğrudan yabancı sermaye yatırımı ve bilgi-iletişim teknolojilerinin ise pozitif etkiye sahip olduğunu göstermektedir. Konya nedensellik testi sonuçları incelendiğinde ise küreselleşme ile beşeri sermaye arasında Güney Afrika’da iki yönlü, Rusya ve Çin’de küreselleşmeden beşeri sermayeye doğru tek yönlü nedensellik ilişkisi olduğu tespit edilmiştir.
This study adds to the understanding of China's innovation prospects by examining how variations in institutional quality within China impact on the R&D efforts of firms located in different provincial regions. In the process of identifying the effect of institutional quality, the roles of other factors such as ownership types and market structures are revealed, which provides interesting insight into firms' R&D behavior. The key findings suggest that institutional quality positively affects the decision of firms to engage in R&D activities. Once firms start to engage in R&D, the subsequent expansion of firm-level R&D intensity depends on factors such as market structure. Therefore, strengthening domestic institutional quality is the first critical step towards the goal of building a knowledge-intensive economy in China. Efforts to nurture market development are also important for achieving this goal.
We investigate the role of institutions and human capital on economic performance of Brazilian municipalities. We use instrumental variables with two-stage least squares estimators for capturing causal relationships. We found evidence that institutional quality has an important and robust effect on the income of municipalities. However, there is no robust evidence for the role of human capital. These results are similar to what Acemoglu, Galleano and Robinson (2014) documented in their research conducted with crosscountry data. Human capital is likely to be a consequence of institutions.
The aim of the present study is twofold. First, we develop a theoretical model which incorporates the role of institutions in promoting economic growth. The theoretical model predicts that rent seeking activities decrease as institutional quality improves, and hence income increases and vice versa. Second, we conduct an empirical analysis to quantify the impact of institutions on economic growth in selected Asian economies over the period 1996-2012 by employing both static and dynamic panel system Generalised Method of Moments (GMM) technique with fixed effects. The empirical results reveal that institutions indeed are important in determining the long run economic growth in Asian economies. However, the impact of institutions on economic growth differs across Asian economies and depends on the level of economic development. The results reveal that institutions are more effective in developed Asia than developing Asia. This evidence implies that different countries require different set of institutions to promote long term economic growth.
After two decades of very high economic growth rates, China has now reached the so-called mid-income range or ‘trap’, i.e. a development level where it has to expect slower economic growth rates (a ‘New Normal’) for the future. Associated with that is a structural change towards tertiarization which requires some fundamental rebalancing of China’s economy. Overcoming this mid-income trap and further catching up to the most advanced countries in the world is a very demanding task. In order to succeed China has to efficiently manage the mentioned rebalancing (structural change) process towards tertiarization and to undertake many fundamental structural reforms.
China's remarkable economic success rests on a foundation of political reform providing a considerable degree of credible commitment to markets. This reform reflects a special type of institutionalized decentralization that the authors call “federalism, Chinese style.” This form of decentralization has three consequences. First, it fosters competition, not only in product markets, but also among local governments for labor and foreign capital. This competition, in turn, encourages local government experimentation and learning with new forms of enterprises, regulation, and economic relationships. Second, it provides incentives for local governments to promote local economic prosperity. Finally, it provides a significant amount of protection to local governments and their enterprises from political intrusion by the central government.
China’s economic reforms have resulted in spectacular growth and poverty reduction. However, China’s institutions look ill-suited to achieve such a result, and they indeed suffer from serious shortcomings. To solve 'China puzzle' this paper analyses China's institution - a regionally decentralized authoritarian system. The central government has control over personnel, whereas sub-national governments run the bulk of the economy; and they initiate, negotiate, implement, divert and resist reforms, policies, rules and laws. China's reform trajectories have been shaped by regional decentralization. Spectacular performance on the one hand and grave problems on the other hand are all determined by this governance structure.
Aligning the interests of local governments with market development is an important issue for developing and transition economies. Using a panel data set from China, we investigate the relationship between provincial government's fiscal incentives and provincial market development. We report three empirical findings. First, we find that during the period of “fiscal contracting system” the discrepancy between ex ante contracts and ex post implementation was relatively small, suggesting that the fiscal contracts were credible. Second, we find a much higher correlation, about four times, between the provincial government's budgetary revenue and its expenditure during 1980s and 1990s as compared to 1970s, demonstrating that provincial governments faced much stronger ex post fiscal incentives after reform. Third, we find that stronger ex ante fiscal incentives, measured by the contractual marginal retention rate of the provincial government in its budgetary revenue, are associated with faster development of the non-state sector as well as more reforms in the state sector in the provincial economy. This holds even when we control for the conventional measure of fiscal decentralization. Finally, we compare federalism, Chinese style, to federalism, Russian style.
This article surveys the latest developments in the literature on the impact of inward foreign direct investment (FDI) on growth in developing countries. In general, FDI is thought of as a composite bundle of capital stocks, know-how, and technology, and hence its impact on growth is expected to be manifold and vary a great deal between technologically advanced and developing countries. The ultimate impact of FDI on output growth in the recipient economy depends on the scope for efficiency spillovers to domestic firms, by which FDI leads to increasing returns in domestic production, and increases in the value-added content of FDI-related production.
A survey of the recent literature on cross country development reveals that there is an agreement on the key role played by institutions in explaining variation in the level of income per capita. Rodrik et al. (NBER Working Paper No. w8119, February, 20029.
Rodrik D
Subramanian A
Trebbi F 2002 Institutions rule: the primacy of institutions over geography and integration in economic development NBER Working Paper No. w9305 October View all references) goes further to argue the primacy of institutions over integration and geography in a level accounting framework. The robustness of this result is checked by changing the dependent variable from level to growth and find that the same holds true.
There is a significant body of literature arguing that institutional quality is the key for long run economic growth and development. While the majority of these studies are based on cross-country growth regressions, we focus on the institution-economic growth nexus within a particular country, namely China. China is often regarded as an exception by having achieved miraculous growth for more than three decades despite relatively low institutional quality. Nonetheless, our findings suggest that at the provincial level, institutional quality played in fact an important role for the economic success of a province in China, even more important than geography and integration. However, when simultaneously examining the relationship between institutions, human capital, and economic development, we find that human capital ‘trumps’ everything else; however institutional quality has a highly significant indirect effect on provincial per capita income by improving human capital. We employ, among others, instrumental variable estimation techniques to address endogeneity problems.
Over the last decade, a growing body of literature dealing with the phenomenon of the “middle-income trap” (MIT) has emerged. The term MIT usually refers to countries that have experienced rapid growth and thus reached the status of a middle-income country (MIC) in a very short period of time, but have not been able to further catch up with the group of high-income economies. In particular, since the beginning growth slowdown of the Chinese economy in 2011, there has been rising concern that China is, or will also be, confronted with such a trap. This paper analyzes the Chinese MIT situation taking into account both the (absolute and relative) empirical MIT definitions and MIT triggering factors identified in the literature. We not only survey the recent literature, but also make our own MIT forecasts and analyze under which conditions China could be caught in an MIT.
This study tests the causal relationships between quality of governance and economic growth at the provincial level in China during the post-Mao reform era. Exploiting the wide cross-provincial variation and rapid change over time in governance institutions and economic performance in China during this period (covering 1985–2005), the study provides a new perspective on the relationship between governance and growth. Whereas a large body of prior literature has demonstrated a strong positive association between high-quality governance institutions and good economic performance at the cross-country level, few quantitative studies have explicitly tested the direction of causality between changes in governance quality and changes in economic outcomes. This study aims to address this gap in the literature by testing two causal hypotheses on the interplay between provincial-level governance and economic performance in China: (i) improvements in provincial quality of governance predict subsequent economic growth rates, and (ii) increases in provincial economic growth rates predict subsequent changes in quality of governance. Using new heterogeneous Granger causality tests that allow for potential differences in the causal relations across provinces, I show a significant and positive effect of economic growth on subsequent quality of governance, largely driven by growth in the secondary sector, but no significant effect of quality of governance on economic growth. These findings suggest that improvements in formal governance have not been a key factor driving China’s rapid growth; instead, the observed positive association between governance and growth reflects the ability of provincial governments to harness the potential created by economic growth to implement subsequent governance improvements. For researchers studying the effect of governance on growth, the results suggest that greater attention should be paid to possible reverse causality from economic outcomes to governance changes.
How can property rights be protected and contracts be enforced in countries where the rule of law is ineffective or absent? How can firms from advanced market economies do business in such circumstances? InLawlessness and Economics, Avinash Dixit examines the theory of private institutions that transcend or supplement weak economic governance from the state.In much of the world and through much of history, private mechanisms--such as long-term relationships, arbitration, social networks to disseminate information and norms to impose sanctions, and for-profit enforcement services--have grown up in place of formal, state-governed institutions. Even in countries with strong legal systems, many of these mechanisms continue under the shadow of the law. Numerous case studies and empirical investigations have demonstrated the variety, importance, and merits, and drawbacks of such institutions.This book builds on these studies and constructs a toolkit of theoretical models to analyze them. The models shed new conceptual light on the different modes of governance, and deepen our understanding of the interaction of the alternative institutions with each other and with the government's law. For example, one model explains the limit on the size of social networks and illuminates problems in the transition to more formal legal systems as economies grow beyond this limit. Other models explain why for-profit enforcement is inefficient. The models also help us understand why state law dovetails with some non-state institutions and collides with others. This can help less-developed countries and transition economies devise better processes for the introduction or reform of their formal legal systems.
This study attempts to examine the impact of various institutions on economic growth using panel data for 56 countries over the period 1981–2010. These impacts have been examined at aggregated level for world representative sample as well as for the sample disaggregated by the development level of the countries. We have estimated static panel using fixed effects model and dynamic panel using system GMM. The empirical analysis confirms a positive relationship between institutions and economic growth. The positive impact of control over corruption, qualitative and effective bureaucracy and desirable law and order situation on economic growth is greater in high income countries as compared to low income countries. The impact of investment profile is more growth enhancing in developing countries in contrast to developed economies. The crux of the analysis is that the institutions are indeed important in determining the long-run economic growth. It is also established that institutions play a greater role in determining growth in developed economies relative to developing economies. The implication of this finding is that different countries require different sets of institutions for ensuring long-term economic growth.
Measurement and analysis of local government efficiency is important; however, it is also difficult. To measure government efficiency, this paper employs the relative measurement method described in the research literature. It develops and applies an index to measure and rank the government efficiency of 31 provincial governments in China (including autonomous regions and municipalities) from 2001 to 2010. This permits a comparative analysis of provincial government efficiency and of the factors that influence it, among China's eastern, central, and western regions. The findings suggest a high association between the degree of economic development and local government efficiency, and in this respect, a large disparity has been observed between central and western regions on the one hand and the eastern region on the other. It is argued that provincial governments in the central and western regions should focus on improving residents' welfare, the quality of regional economic growth, and the level of social development by constantly enhancing government efficiency, optimizing the supply of public services, controlling the size of government, and thus improving residents' disposable income. © 2014 The Authors. Journal of Public Affairs published by John Wiley & Sons Ltd.
This study examines the effects of multinationals and economic institutions on the economic growth of cities in China. Consistent with previous findings, the empirical results suggest that property rights institutions are significantly more important than contracting institutions in promoting economic growth. The direct effect of multinationals on economic growth is generally insignificant statistically. However, a statistically significant and robust interaction effect exists between property rights institutions and multinationals on economic growth, whereas no such effect is observed between contracting institutions and multinationals. The results are attributable to the fact that multinationals can rely on reputation or personal connections to enforce contracts when contracting institutions are weak. However, it is difficult for multinationals to operate when the state expropriates their profits (i.e. property rights institutions are weak).
The resource curse has been mainly studied using cross-country samples. In this paper we analyze a cross-province sample from one country: China. We focus on the interplay between resource abundance, institutional quality, and economic growth, using two different measures of resource abundance (a stock: resource reserves; and a flow: resource revenues), and employing various econometric approaches including varying coefficient models. We find that resource abundance has a positive effect on economic growth at the provincial level in China between 1990 and 2008, an effect that depends nonlinearly on institutional quality (1995 confidence in courts). The ‘West China Development Drive’ policy, initiated in 2000, caused substantial changes, which we investigate through a comparative panel-data analysis.
This paper contributes to the debate on the relationship between human capital, institutions, and economic growth. The paper first develops a micro-foundation model linking institutions to human capital. The advantage of our modeling strategy is that the human capital accumulation function is derived from an endogenous process. The theoretical model shows that improvements in the quality of institutions foster human capital accumulation, decrease income inequality and change the historical development path. The paper uses cross-country panel data from 1965 to 2005 to test some of the model's propositions and finds that deep structures or structural institutions – which are very persistent and rooted on the historical development path of an economy – affect long-term economic performance, while political institutions are uncorrelated with productivity and long-term economic growth. The empirical estimates also show that growth of physical and human capital – instead of levels – determines long-run economic growth.
The conditions associated with the existence and stability of democratic society have been a leading concern of political philosophy. In this paper the problem is attacked from a sociological and behavioral standpoint, by presenting a number of hypotheses concerning some social requisites for democracy, and by discussing some of the data available to test these hypotheses. In its concern with conditions—values, social institutions, historical events—external to the political system itself which sustain different general types of political systems, the paper moves outside the generally recognized province of political sociology. This growing field has dealt largely with the internal analysis of organizations with political goals, or with the determinants of action within various political institutions, such as parties, government agencies, or the electoral process. It has in the main left to the political philosopher the larger concern with the relations of the total political system to society as a whole.
We exploit differences in European mortality rates to estimate the effect of institutions on economic performance. Europeans adopted very different colonization policies in different colonies, with different associated institutions. In places where Europeans faced high mortality rates, they could not settle and were more likely to set up extractive institutions. These institutions persisted to the present. Exploiting differences in European mortality rates as an instrument for current institutions, we estimate large effects of institutions on income per capita. Once the effect of institutions is controlled for, countries in Africa or those closer to the equator do not have lower incomes. (JEL O11, P16, P51).
After three decades of spectacular economic successes, China is facing a significant challenge. The string of recent scandals – environmental degradation, melamine-tainted milk powder, fake drugs and chemicals – have all pointed to government weakness in protecting public safety, exposing an enormous gap between China's growing economic prowess and its capacity to govern. With the leadership now focused on improving the regulatory regime, will China “catch up” and build the public institutions needed? This article argues that the reactive, incremental retrenchment of government in the 1980s and 1990s, combined with inadequate finance, had broken the intergovernmental fiscal system and created large distortions in the incentive structure facing government agencies and public institutions (shiye danwei 事业单位). Until the intergovernmental fiscal system is repaired and incentives are fundamentally reformed for the public sector, the top-down programme to redirect China's development and build a service-oriented government will have limited effect.
This paper examines how international flows of technological knowledge affect economic performance across industries and firms in different countries. Motivated by the large share of the world's technology investments made by firms that are active across borders, we focus on international trade and multinational enterprise activity as conduits for technological externalities, or spillovers. In addition to reviewing the recent empirical research on technology spillovers, the discussion is guided by a new model of foreign direct investment, trade, and endogenous technology transfer. We find evidence for technology spillovers through international trade and the activity of multinational enterprises. The analysis also highlights challenges for future empirical research, as well as the need for additional data on technology and innovation.
During the last twenty years economics literature and debates have increasingly referred to institutions as the answers to the longstanding questions concerning how economic growth arises, what policies can be used to promote best results in terms of economic performances and what accounts for differences in GDP levels among countries so that the analysis of the institutional framework under which any economy operates has now become an indispensable object of research. This paper will investigate the impact of institutional quality on economic growth over sixty years among countries at different stages of development recurring to three institutional indicators tested through a pooled regression model and a fixed effects model.
This paper is an attempt to account for the social foundations of China’s economic transition from central planning to a market
economy which is a process of the completion and perfection of markets. In the early stage of China’s transition, relational
contracts and interlinked arrangements constitute effective substitutes for missing and imperfect markets. However, relational
contracting is becoming more costly as China’s economy develops. Its costs include, diseconomy of scale, undermining the development
of arm-length transactions and formal institutions, among others. There are two possible future trajectories of China’s reform.
One possibility is that the markets are so developed so that they are dis-embedded from sociopolitical powers. A second is
that the markets are less developed and embedded in sociopolitical powers.
This article develops a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables. Our formulation clarifies the relationship between the existing estimators and the role of transformations in panel data models. We characterize the valid transformations for relevant models and show that optimal estimators are invariant to the transformation used to remove individual effects. We present an alternative transformation for models with predetermined instruments which preserves the orthogonality among the errors. Finally, we consider models with predetermined variables that have constant correlation with the effects and illustrate their importance with simulations.
In the presence of uncertainty about what a country can be good at producing, there can be great social value to discovering costs of domestic activities because such discoveries can be easily imitated. We develop a general-equilibrium framework for a small open economy to clarify the analytical and normative issues. We highlight two failures of the laissez-faire outcome: there is too little investment and entrepreneurship ex ante, and too much production diversification ex post. Optimal policy consists of counteracting these distortions: to encourage investments in the modern sector ex ante, but to rationalize production ex post. We provide some informal evidence on the building blocks of our model.
Estimation of the dynamic error components model is considered using two alternative linear estimators that are designed to improve the properties of the standard first-differenced GMM estimator. Both estimators require restrictions on the initial conditions process. Asymptotic efficiency comparisons and Monte Carlo simulations for the simple AR(1) model demonstrate the dramatic improvement in performance of the proposed estimators compared to the usual first-differenced GMM estimator, and compared to non-linear GMM. The importance of these results is illustrated in an application to the estimation of a labour demand model using company panel data.
This paper develops the empirical and theoretical case that differences in economic institutions are the fundamental cause of differences in economic development. We first document the empirical importance of institutions by focusing on two “quasi-natural experiments” in history, the division of Korea into two parts with very different economic institutions and the colonization of much of the world by European powers starting in the fifteenth century. We then develop the basic outline of a framework for thinking about why economic institutions differ across countries. Economic institutions determine the incentives of and the constraints on economic actors, and shape economic outcomes. As such, they are social decisions, chosen for their consequences. Because different groups and individuals typically benefit from different economic institutions, there is generally a conflict over these social choices, ultimately resolved in favor of groups with greater political power. The distribution of political power in society is in turn determined by political institutions and the distribution of resources. Political institutions allocate de jure political power, while groups with greater economic might typically possess greater de facto political power. We therefore view the appropriate theoretical framework as a dynamic one with political institutions and the distribution of resources as the state variables. These variables themselves change over time because prevailing economic institutions affect the distribution of resources, and because groups with de facto political power today strive to change political institutions in order to increase their de jure political power in the future. Economic institutions encouraging economic growth emerge when political institutions allocate power to groups with interests in broad-based property rights enforcement, when they create effective constraints on power-holders, and when there are relatively few rents to be captured by power-holders. We illustrate the assumptions, the workings and the implications of this framework using a number of historical examples.
This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized
method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our
GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation
in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables.
We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying
restrictions and Hausman specification tests.
The difference and system generalized method of moments (GMM) estimators are growing in popularity. As implemented in popular software, the estimators easily generate instruments that are numerous and, in system GMM, potentially suspect. A large instrument collection overfits endogenous variables even as it weakens the Hansen test of the instruments' joint validity. This paper reviews the evidence on the effects of instrument proliferation, and describes and simulates simple ways to control it. It illustrates the dangers by replicating Forbes ["American Economic Review" (2000) Vol. 90, pp. 869-887] on income inequality and Levine "et al." ["Journal of Monetary Economics"] (2000) Vol. 46, pp. 31-77] on financial sector development. Results in both papers appear driven by previously undetected endogeneity. Copyright (c) Center for Global Development 2009.
China's reform worked and produced one of the most impressive growth in the largest developing and transition economy in the world in the past twenty-two years. That China has managed to grow so rapidly despite the absence of many conventional institutions such as rule of law and secure private property rights is puzzling. To understand how reform works in a developing and transition economy that has great growth potential, it is not enough to study the conventional "best-practice institutions" as a desirable goal. One should also study how feasible, imperfect institutions have evolved to complement the initial conditions and to function as stepping stones in the transition toward the goal. Underlying China's reform is a serial of institutional changes concerning the market, firms, and the government in the novel form of "transitional institutions." These institutions succeed when they achieve two objectives at the same time: to improve economic efficiency by unleashing the standard forces of incentives and competition on the one hand, and to make the reform a win-win game and thus interest compatible for those in power on the other.
We estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instrumental variables for institutions and trade. Our results indicate that the quality of institutions "trumps" everything else. Once institutions are controlled for, conventional measures of geography have at best weak direct effects on incomes, although they have a strong indirect effect by influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant, and often enters the income equation with the "wrong" (i.e., negative) sign. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.
This paper explores the effects of inflows of foreign technology on technological development in developing countries. It evaluates the existing literature exploring this issue and indicates directions for further research. In particular, it is argued that the implications of the theory of foreign direct investment (the dominant channel of international technology transfer) for technological development have not been fully explored. Dynamic analyses of technology transfer that accommodate the salient features of developing countries have also begun to appear only recently. Further work along these lines is likely to yield rich dividends. Copyright 1997 by Blackwell Publishing Ltd
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
The focus of policy reform in developing countries has moved from getting prices right to getting institutions right, and accordingly countries are increasingly being advised to move towards "best-practice" institutions. This paper argues that appropriate institutions for developing countries are instead "second-best" institutions - those that take into account context-specific market and government failures that cannot be removed in short order. Such institutions will often diverge greatly from best practice. The argument is illustrated using examples from four areas: contract enforcement, entrepreneurship, trade openness, and macroeconomic stability.
Institutions, Human Capital and Development
- D Acemoglu
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- J A Robinson
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Distance to Frontier, Selection, and Economic Growth
- D Acemoglu
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NERI INDEX of Marketization of China’s Provinces
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Do Institutions Cause Growth?
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Speech at the Fudan University's Fanhai School of International Finance
- B Hofman
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Analysis on Efficiency of Prefecture-level City Government in 2016
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Understanding and Interpreting Chinese Economic Reforms
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China Meets the Middle-Income Trap: The Large Potholes in the Road to Catching-up
- W T Woo
The Fundamental Institutions of China’s Reforms and Development
- C Xu