Warfare, Fiscal Capacity, and Performance

We exploit differences in casualties sustained in pre-modern wars to estimate the impact of fiscal capacity on economic performance. In the past, states fought different amounts of external conflicts, of various lengths and magnitudes. To raise the revenues to wage wars, states made fiscal innovations, which persisted and helped to shape current fiscal institutions. Economic historians claim that greater fiscal capacity was the key long-run institutional change brought about by historical conflicts. Using casualties sustained in pre-modern wars to instrument for current fiscal institutions, we estimate substantial impacts of fiscal capacity on GDP per worker. The results are robust to a broad range of specifications, controls, and sub-samples

State history and economic development: evidence from six millennia

The presence of a state is one of the most reliable historical predictors of social and economic development. In this article, we complete the coding of an extant indicator of state presence from 3500 BCE forward for almost all but the smallest countries of the world today. We outline a theoretical framework where accumulated state experience increases aggregate productivity in individual countries but where newer or relatively inexperienced states can reach a higher productivity maximum by learning from the experience of older states. The predicted pattern of comparative development is tested in an empirical analysis where we introduce our extended state history variable. Our key finding is that the current level of economic development across countries has a hump-shaped relationship with accumulated state history

Privatization and growth: natural experiment of European economies in transition

European ex-socialist countries’ experience is exploited for two difference-in-differences analysis: effects of a) transition to a market economy, and b) accession to the European Union (EU) on income. Many countries adopting regime change simultaneously; and ten of them joining the EU mostly in 2004 provides a rich setting. Post-privatization growth varies by ex-ante institutional settings - whether they existed as separate countries before 1991 or came into being by break-up of a larger block - and by ex-post aspiration of (and then) joining the EU. We show starkly how unsuccessful was transition to a market economy - it increased income gap of most of them from the US for at least 13 years. The paper shows institutions are important/critical for growth in middle- or high-income countries of Europe also; and better institutions enhance the role of one (rather than all) proximate factor for growth. Using growth accounting, the growth effects are mostly driven by human capital (rather than by TFP). This paper a) presents a nuanced perspective on privatization’s effect on growth, and b) identifies human capital to be the proximate factor through which the fundamental factor of institutions promotes growth

Identifying the effect of institutions on economic growth

This chapter describes how institutional quality can be measured, quantifies the correlation between institutional and economic developments, and reviews and discusses the literature on the causal impact of institutions on growth. Identifying a causal effect of institutions on development, and understanding the technology of the transmission of institutional quality to growth are challenging issues. This is due to the difficulty (i) of disentangling the causal and reversing the causal effects, (ii) of accounting for unobserved shocks affecting both institutions and growth, and (iii) of capturing the lag structure of the relationship. To address these problems, existing cross-country studies have instrumented institutional quality using variables reflecting the settlement decisions of colonizers and imperial powers between the 16th and the 19th century. While fully recognizing the merits and the methodological rigor of this literature, I show that the type of institution implemented by imperial powers was statistically linked to unobserved factors affecting long-run economic performance. Hence, the quantitative predictions of these studies must be used with caution. Alternatively, collecting long-run data on institutional and economic changes, and searching for quasi-natural experiments (comparing the dynamics of countries which were initially similar and experienced different, unexpected institutional shocks) are promising research avenues

Growth, public investment and corruption with failing institutions

Public investment, Corruption, Political power, O41, H50, D73,