Globalization, Economic Growth and Institutional Development in China

Abstract

Unlike most previous works which commonly define globalization as a strict economic characteristic, using the overall globalization index and its three sub-dimensions – economic, social and political integrations to proxy openness, this paper examines the effect of globalization on economic growth associated with autocratic institutional in China, using the a two-step dynamic panel generalized method of moments technique in a panel of 30 provinces, municipalities and the autonomous regions over the period of 1970–2006. We find that different globalization indices have different impacts on regional economic growth. Also, autocracy may harm regional development, but these conclusions are very sensitive to different globalization variables specifications. Further, considering the interactive effects between globalization and economic growth, we show that in the period of higher global integration, the higher democracy (lower autocracy) may harm economic growth in the case of China. We emphasize that democracy is clearly not a necessary condition for the purpose of economic growth in China.

Key Words:

• Globalization
• economic growth
• institutionalized autocracy
• China

Jel Classification:

• F59
• O53
• C33

Acknowledgements

We thank the editor and two anonymous referees for their helpful comments and suggestions. An earlier version of this paper was completed while Chun-Ping Chang was a visiting fellow at the School of Economics and Finance, Xi'an Jiaotong University, he thanks the warm reception of Dean Feng. Chun-Ping Chang is grateful to the National Science Council of Taiwan for financial support through grant NSC [100-2410-H-158-003]. All remaining errors are our own.

Notes

1. Dollar and Kraay (2003) conclude that countries with better institutions have a faster growing trade volume. However, most previous studies show that institution influences significantly on economic growth using cross-country data-set; but it is difficult to explain the variety in cultural norms, historical experiences and institutional contexts (Hasan et al., 2009).

2. One thing worth noting is that using panel data creates another problem in which different provinces in China as a whole are treated as an entity instead of a separate unit.

3. Dreher et al. (2008) construct an index of globalization covering three main dimensions: economic, social and political integrations with the advantage of a very comprehensive measure to obtain an aggregate measure of globalization, updated every year with dates back to 1970 and covers over hundreds of countries (Rao & Vadlamannati, 2011).

4. Prasad (2009) demonstrates that there are a number of factors that could trigger unfavourable economic dynamics in China even if they do not rise to the level of a crisis, they could have serious adverse repercussions on growth and welfare.

5. According to Sumner (2004), the economic liberalization is a process of opening and a policy input or series of policy changes enacted by government, while the economic internationalism is a policy output, an outcome of openness, over which governments have no direct control.

6. Since the provincial-level globalization index is still lacking, the country-level globalization index is applied, which implicitly assumes that the role of globalization is fixed over provinces, but varied over time. We believe that such setup is suitable as the discussions of presidential “coattail effect” in those political cycles paper in the USA, to measure that a popular president spill his “coattails” to bring out supporters who then vote for his party's candidates for other offices, in particular in state-wide election. Several papers thus adopt a national-wide dummy variable to refer to this coattails phenomenon, see for examples as Samuels (2000) and Golder (2006).

7. For excellent discussions of the dynamic panel method, see the interesting textbooks of Baltagi (2008) and Arellano (2003).

8. The instruments are lagged levels for differences and lagged differences for levels. Typically, all available lags are used as instruments, which guarantee maximum efficiency.

9. We employ the finite-sample correction derived by Windmeijer (2005) to these standard errors in order to evaluate the precision of the two-step estimators for hypothesis tests.

10. We select year 1970 as the beginning year because KOF data are available from that year.