What factors are important for an economy to succeed? Interest rates? Taxes? Property rights?
The recently deceased Nobel laureate Douglass North said institutions determine an economy’s success. He defined them as follows: “Humanly devised constraints that structure political, economic, and social interactions.”
Nowhere else is this concept as true as in modern China. So Andrew Sheng, an adjunct professor at Tsinghua University in Beijing, and Xiao Geng, a professor at the University of Hong Kong, took a look at North’s work and applied it to China’s institutions today.
They find that China is moving toward the institutional framework North recommends. Let’s see if their arguments measure up to reality.
North said that institutions should foster competition within and between sovereign entities. Sheng and Geng say this is by and large the case in China and it’s getting better.
