The Effect of Governance Quality on Economic Growth: Based on China’s Provincial Panel Data

Jiandang Liu,Bo Zhou,Jie Tang,Zhijun Liang

doi:10.3390/economies6040056

Abstract

This paper investigates the impact of governance quality on economic growth in China. After developing a theoretical framework for the effect of governance quality on local economic growth, this article studies the panel data in provincial regions over the period 2001–2015 by constructing a new comprehensive index of provincial governance, and checks the robustness of the empirical findings from four aspects. The results show that governance quality has a positive effect on economic growth, due to good governance strengthening the “helping hand” or weakening the “grabbing hand” of power. Governance quality presents diminishing marginal returns, which means that the high-speed economic growth effect becomes less and less, while the high-quality economic development effect becomes more and more. Higher governance quality could bring a high-speed economic growth effect in the western region, while higher governance quality could bring a high-quality economic development effect in the eastern region. Compared with fixed-asset investment, human capital has played a more important role in economic growth. In order to promote the sustainable development of China’s economy, policy makers should improve local governance quality, strengthen the capacity of independent innovation, and promote the accumulation of high-quality human capital.

Highlights

Since the early 1980s, China’s economy has maintained rapid growth, with an average annual growth rate of more than 9%
The results show the following: (1) governance quality has a positive effect on economic growth, due to good governance strengthening the “helping hand” or weakening the “grabbing hand” of power; (2) governance quality presents diminishing marginal returns, because late-mover advantages become less and dividends from system reform become smaller; (3) higher governance quality could bring a high-speed economic growth effect in the western region, while higher governance quality could bring a high-quality economic development effect in the eastern region; and (4) compared with fixed-asset investment, human capital has played a more important role in economic growth
According to Hypothesis 2 and the scatter plot the economic growth effect of governance quality may have diminishing marginal phenomenon, so above, the economic growth effect of governance quality may have diminishing marginal this paper considers the square term of the comprehensive index of governance quality

Summary

Introduction

Since the early 1980s, China’s economy has maintained rapid growth, with an average annual growth rate of more than 9%. Per capita GDP (gross domestic product) has increased from lower than $300 in 1978 to over $8000 in 2016, which implies that China has finished a great transformation from low income to upper middle income. During this period, China has actively promoted reform in all fields and improved local governance quality a great deal. This article wants to ask several questions, such as, among others, the following: (1) whether the governance quality has played an important role in China’s past economic growth? This article wants to ask several questions, such as, among others, the following: (1) whether the governance quality has played an important role in China’s past economic growth? (2) If yes, what are the characteristics of this role?

Objectives

Methods

Results

Conclusion