How long can China’s economy continue to grow? Not much longer, we suspect, unless the country engages in deep structural reforms that improve its institutions. It’s well known that countries’ economic performance is related to institutional quality, which is gauged by factors like political stability, government efficiency, and the prevalence of corruption. China has sustained high growth rates in recent years despite its poor institutions because institutional quality is relatively less important in developing economies. However, we find that as their incomes increase, such countries need good institutions in order to reach the income levels of advanced economies. This chart links institutional quality, measured as the average of six governance indicators produced by the World Bank, to income per capita in 2007. There is only a mild positive relationship between the two variables below $10,000 per capita. After that, the relationship becomes very strong. We call the barrier around $10,000 to $12,000 the Great Wall. Without reform, countries hit that wall and stagnate.
Another Challenge to China’s Growth
How long can China’s economy continue to grow? Not much longer, we suspect, unless the country engages in deep structural reforms that improve its institutions. It’s well known that countries’ economic performance is related to institutional quality, which is gauged by factors like political stability, government efficiency, and the prevalence of corruption. China has sustained […]
Summary.
Reprint: F0903B
Below $10,000 per capita, a country’s income can grow even in the absence of good institutions. But at higher income levels, as China will soon discover, institutional quality starts to matter quite a lot.
A version of this article appeared in the March 2009 issue of Harvard Business Review.