Institutional Quality, Financial Friction, and Sustained Economic Growth: The Case of China

Junqing Li, Qiheng Han, Pengfei Liu and Jianbo Zhang

Emerging Markets Finance and Trade, 2020, vol. 56, issue 14, 3270-3293

Abstract: Can an economy achieve sustained growth without significant improvement in institutional quality? What are the differences in the driving forces of short- and long-term growth? This paper tries to answer these questions in a simple framework with financial friction. Our theoretical model shows that, at the early stage, institutional quality does not play a critical role because the return differential is too high to overcome the friction of low institutional quality. However, as the economy grows, institutional quality eventually becomes the most important factor affecting economic growth. Thus building high-quality institutions plays a critical role in long-term economic growth.

Date: 2020
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DOI: 10.1080/1540496X.2019.1700111

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