This paper discuses the recent debate on institutional primacy view and human capital primacy view by examining China’s experience. We find that empirical results are highly sensitive to indicator generating methods. Different methods may lead to opposing conclusions. Simulation results also reveal the persistently different statistical properties of two indicator generating methods under use. By an indirect approach, regression results show that institutional variables dominate human capital in China’s case. However, when considering policy choices, we find that institutional variables are of only second-order importance. It shows that the good policies may be able to compensate the shortcomings of institutions, at least in the short run, which intuitively matches China’s rapid economi...[ Read more ]

This paper discuses the recent debate on institutional primacy view and human capital primacy view by examining China’s experience. We find that empirical results are highly sensitive to indicator generating methods. Different methods may lead to opposing conclusions. Simulation results also reveal the persistently different statistical properties of two indicator generating methods under use. By an indirect approach, regression results show that institutional variables dominate human capital in China’s case. However, when considering policy choices, we find that institutional variables are of only second-order importance. It shows that the good policies may be able to compensate the shortcomings of institutions, at least in the short run, which intuitively matches China’s rapid economic growth experience in an environment with obvious institutional weakness.