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Institutional change and economic growth: evidence from China, 1978-2008

Shiyong Zhao, Jianhui Jian, Shifeng Zhao

China’s economic growth since 1978 is a miracle. We argue that gradual and persistent institutional changes and policy reforms that have reduced distortions and improved incentives are the main reasons for the miracle. Specifically, liberalization, marketization, and privatization have intertwined to play their roles. We use a panel dataset covering 31 Chinese provinces over 1978-2008 to test the hypothesis. The share of private sector in the economy is used as a measure of institutional change and policy reforms. We find that China’s GDP will grow by 0.5 percent if the private share increases by 1 percentage point