Influence of government and market on the relationship between institutional change and Chinese total factor productivity

Abstract

Chinese economists always pay much attention on how to improve Chinese total factor productivity and make it to be driving factor of Chinese economic growth. Based on the provincial panel data from 1997 to 2011 of 29 provinces (cities, districts) in China, here, we did empirical research on the effects of mandatory institutional change and induced institutional change on Chinese total factor productivity. The induced institutional change and mandatory institutional change was represented by the China marketization index which was proposed by the Fan et al. and preferential policy index, respectively. The results show that the influence of the institutional change on Chinese total factor productivity is heterogeneity. Mandatory institutional change has significant positive effects on Chinese total factor productivity, while induced institutional change has negative effects. These findings indicated that mandatory institutional change dominated by the government is an important reason to promote Chinese total factor productivity, which means the government plays an important part in the process of institutional change. Our study has important implication on how to properly handle the relationship between government (“visible hand”) and market (“invisible hand”) under the new normal and how to coordinate the relationship between the decisive role of market in the allocation of resources and the role of government on economic growth.