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

2. About Authors Ying Fang: Associate professor of economics at the Wang Yanan Institute for studies in economics. Yang Zhao: Xiamen University

3. Introduction China Landmass is about the size of Europe Population is estimated at one-fifth of the world Over 300 cities 80% of productivity gap among cities, explained by the investment climate (World Bank, 2006).

4. Introduction How can we understand the large spatial differences in economic performance? schools of thought on this question: Institutions Geography Human capital and government policy China provides a easy way to compare these three.

5. Previous studies on this topic Paulo Mauro: Ethno linguistic Institutions Economic Fractionalization (Corruptions) growth

6. Previous studies on this topic 2. Hall and Jones Distance Social Growth From Equator Infrastructure

7. Previous studies on this topic Acemoglu and Johnson European settler Institution Economic mortality rate Growth

8. Reason for Use of instrumental variable: problem of endogeneity makes it impossible to establish a causal relationship Economic performance Institution Reverse causality

9. Reason for Use of instrumental variable: problem of endogeneity Institution Economic performance 2. Mutual causation U

10. Author’s IV: Enrollment in protestant missionary primary schools in the early 20th century. Reasons for choice of IV: History Geography Protestant education: enrollment in protestant education in 1919 Enrollment in protestant missionary primary schools in the early 20th century. Institution (Index of property rights protection) Economic performance (log of GDP per capita)

11. Definitions & Historical background of China’s institutional changes Trace of the historical influence of the West on China’s institutions What China’s economic transition means? A process whereby property rights are given increasing protection and respect What is Institution? Sets of social rules that protects property rights. Authors focus on implementation rather than paper policy Economic performance: measure of GDP per capita.

12. Data collection process Index is calculated from survey of cities using questionnaires answered by scholars, entrepreneurs and randomly sampled citizens, the index for property right protection is calculated from this survey.

13. Empirical Results 2SLS estimate of economic performance is 4.23., meaning that a city GDP per capita would increase by 4.23% if index of property right increases by 1% 2SLS estimates are larger than OLS estimates which means that OLS estimates are down-ward biased Result is robust when tested for violation of exclusion

14. Institution versus geography First stage regression of institution on IV and geographic factors found IV to be more significant. Second stage regression of Log GDP on institution and geography also found institution as more relevant.

15. Institution Versus Policies In the first stage regression IV estimate is more significant and also in the second stage institution is more significant than policy variables (dummies for coastal open cities, government consumption as percentage of GDP, investment rates in 2004)

16. Conclusion Institutions are significant in explaining the variations among Chinese cities. Institution trumps other explanations for variations in economic performance, that is, geography and policy.

17. Critique Method of sample selection