Do institutions matter? Estimating the effect of institutions on economic performance in China

1. Do institutions matter?Estimating the effect of institutions on economic performance in China Jingxuan MA

2. Authors • Ying Fang Assistant Professor Wang Yanan Institute for Studies in EconomicsXiamen University • Yang Zhao Wang Yanan Institute for Studies in Economics Xiamen University

3. Miracle of China’s Growth • Saving’s rate ? • Development of Human Capital ? • FDI ? • Government policies?

4. Basic Ideas of the Paper • Estimating the effect of institutions on economic performance in China • Trying to explain the reasons of large spatial differences in economic performance in China • Logic: influences of the West influences on institutions influences on economic performance

5. Institutional Change and Economic Development in China • 1553: Macau as a port city • 19th century: Military defeats to Western countries, more port cities • Early 20th century: Revolution. Rapid industrial spurt. • 1937-1949: Battle against Japanese invaders and civil war • 1978: Planned Economy to Market-oriented system. Increasing of international trade • 2001: Member of WTO. • Average growth rate of China’s RGDP per capita: 7.4%, however, large spatial differences in economic performance.

6. Variables • Endogeneity Problem Economic performance Institutions • Using instrumental variable for institutions IV: enrollment in Protestant missionary lower primary schools in the early 20th century Reasons of Choosing this IV: • Movement toward “Modernization”:learning from the West • Spatial differences: Regions more exposed to Western culture V.S others • Reflecting the influence of the West

7. Measurements and Data • 2SLS method • Sample: 47 cities • Model:

8. Main Results • Coefficient of INS is 4.23: means the city’s GDP per capita will increase by 4.23% if its average index of property rights protection increases by 1% • Adding geographically related variables does not have a significant effect on the institution estimates • Central government development policy is not the main explanation for the difference in GDP across the cities in the sample • Different administrative ranks of city has no significant effect on spatial difference • The ratio between government consumption and real GDP is not significant • No significant correlation between investment rate and economic performance

9. Conclusion • Since institutions are widely believed to be endogenous, it’s difficult to evaluate their effect. • The authors believe that the enrollment in Protestant missionary lower primary schools captures the extent of influence from Western countries in the early 20th century. • Since the central aspect of China’s institutional transition has involved learning from the West, the historical influence of the West in the early 20th century may persist in China’s current institutional changes. • Comparing the effect of institutions with that of geography and government policy, institutions occupy a central role in determining economic performance.

10. Some thoughts from myself • Sample biased? • Missed variables? • Endogeneity problem fixed?

11. Thank you!