The deep determinants of economic development in China—a provincial perspective

Abstract

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.