According to Daron Acemoglu and James Robinson, the authors of Why Nations Fail , countries need inclusive institutions so people have incentives and opportunities to study, work, invest and innovate. The most essential inclusive institutions are generally understood to include property rights; intellectual property; free market and competition law; equal access to education and health care; equal political rights; rule of law; and public supervision. Accordingly, if a country has high education investments, a high savings rate, a high labour participation rate and a low unemployment rate, high asset prices (including stocks, real estate and the exchange rate), many patent applications, and many start-ups, then it is safe to infer that residents of the country have no fear that their legal assets will be stolen or taken, and that they are exerting themselves to study, work, invest and innovate. Most likely, this country has inclusive institutions. Today, most Chinese people believe that they can have a good life and move up the social ladder if they study and work hard. They also believe successful investments and innovations are even more “useful” in creating wealth and changing social status. Economists are frequently surprised by the world-beating performance of east China in the Pisa tests, the ultra-high savings rate and the explosion in patent applications in China, and the Chinese people’s hard-working spirit: the key here is inclusive Chinese institutions for the ordinary individual. In the US, it is for the rich and the talented that the American system is extremely motivating. US institutions, including capital markets, an entrepreneurial ecosystem and a flexible labour market, encourage American elites to try their best to study, work, invest and innovate. The American dream that is built on these institutions attracts talent from every corner of the globe. Next, China will need to conduct reforms to establish and improve institutional mechanisms, including the entrepreneurial ecosystem, affordable housing, flexible labour market, that can constantly drive the resource reallocation from the laid-backed firms and sectors to the firms and sectors at the technology frontier. Neither Europe nor Japan has such a lively entrepreneurial ecosystem, vibrant capital markets and flexible labour market. China is trying to learn these market mechanisms from the US and is succeeding in some areas, including technology-focused stock exchanges and an entrepreneurial ecosystem. As a leader in development aid, China can help create a green recovery The market capitalisation of ChiNext, the technology board affiliated to the Shenzhen Stock Exchange, skyrocketed from a mere 161 billion yuan (US$25 billion) by the end of 2009 to 13 trillion yuan (US$2 trillion) as of today. Since 2018, the ChiNext Index and the US Nasdaq Index have risen by almost the same rate. China’s entrepreneurial ecosystem has become so mature that it is helping to fill the gap in the semiconductor industry. The number of chip-related start-ups in China more than tripled in the first five months this year compared to the same period in 2020. Usually funded by venture capital and private equity, such start-ups are now popular employers of college graduates; they raised about 9.45 billion yuan in financing through Shanghai’s Nasdaq-like Star Market in the first half of 2021. Going forward, China needs to undertake real-estate tax and housing market reforms. The companies that own real estate are typically less efficient or are from traditional industries; those that do not possess real estate are usually start-ups. The older generation owns property while the younger does not. Thus, the higher housing prices are, the heavier the burden on start-ups and the younger generation. What’s more, ever-rising housing prices also have an impact on wealth inequality and social mobility. Local governments should rely on real estate tax rather than land transfer fees so that they have fewer incentives to boost housing prices. Just like the transition from an agricultural to an industrial economy, labour reallocation to more productive sectors and firms can constantly fuel economic development. A flexible labour market allows firms to expand headcounts more easily when they are more productive or riding market trends. This flexibility accelerates resource reallocation across industries and companies. However, it may also worsen unemployment and contribute to low labour participation. So, before establishing a flexible labour market, China needs more preparation, including improving the social safety net , which demands considerable fiscal resources. The inclusiveness of institutions can and should be improved over time. In the past 40 years, China has established inclusive institutions for the vast majority; in the future, China will need to learn from better practices in other countries and establish the mechanisms that accelerate the reallocation of resources to the technology frontier, while reducing economic inequality and preserving social mobility. Fang Zihao is studying for a PhD in economics at Koc University in Istanbul