3 - Do Institutions Rule?

Summary

Economists and political scientists tend to explain China’s rapid rise from the institutional perspective. There are two contrasting schools of thought: the free market school and the active government school. Both schools acknowledge that market reform has been a key factor in China’s rapid economic growth, but the active government school also attributes it to China’s strong government and its active economic intervention. These two contrasting institutional views are evaluated in Chapter 3. The short conclusion is that neither view can properly explain the Chinese growth puzzle. The free market view cannot because China’s market is not much freer than that of most developing countries. The active government view cannot either because China is not particularly well ranked in terms of government effectiveness. There are many other institutionalists who hold more fine-grained views than the above two schools. Some of these views are also evaluated in the chapter, which concludes that institutional and policy factors may be important contributors to China’s economic growth, but they are not the differentiating factors that have made China grow faster than all other countries.