Institutions and Growth
Paper Session
Friday, Jan. 6, 2017 3:15 PM – 5:15 PM
Swissotel Chicago, Zurich F
- Chair: Kevin Donovan, University of Notre Dame
Southern Europe's Institutional Decline
Abstract
In this paper we examine the impact of the creation of the euro currency on capital fows, institutions and productivity in Southern Europe (Spain, Portugal, Italy and Greece). We start by documenting that the quality of institutions signicantly declined in that region in the run-up to, and after the creation of, the euro (unlike in the rest of Europe, the OECD, and the rest of the world). We provide evidence that this decline in the quality of institution was associated with large capital inows and also a fall in total factor productivity. We then show that this pattern can be explained by a model of "soft budget constraint" wherein persistently cheap external capital undermines incentives to
maintain good institutions {where the quality of institutions is understood as the ability
of the government to commit not to renance bad projects ex post. Low institutional
quality ultimately results in a high share of inecient projects, which raises productivity
dispersion and lowers average productivity. Finally, we show in a larger panel of countries
that persistent in flows of capital negatively affect the quality of institutions.
Fiscal Federalism, Economic Freedom, and Growth Across German Districts
Abstract
In this paper, we revisit the relationship between economic freedom and growth using the sub-national variation in fiscal and regulatory institutions across 407 German districts (Kreise) for the period 2000-2010. To this end, we build ten indicators of economic freedom for each district and classify them into three latent categories: (i) taxes and government spending, (ii) business regulation, and (iii) size of the public sector. Exploiting the variation in the constructed indices of economic freedom, the evidence suggests less indebted districts with less stringent business regulation, lower share of taxes and relatively smaller public sectors achieve consistently higher economic growth. The beneficial effect of economic freedom on growth is robust to the variety to exclusion restrictions and to numerous specification checks. The effect of economic freedom on growth tends to persist through the specialization channel as higher economic freedom tends to encourage the specialization in high-productivity manufacturing sectors fueling growth. The evidence unveils persistent distributional effects of economic freedom on growth and highlights a U-shaped pattern. Economic freedom is most beneficial for growth in the districts with the lowest per capita income, the effects fades away at the median of district-level income distribution, and tends to accelerate above the median. We address the endogeneity of economic freedom by using the variation in district-level voting outcomes as an excludable and exogenous source of cross-district growth variation. Districts where center-right and liberal parties win a relative vote margin over the center-left parties are more likely to establish greater economic freedom, and the effect on growth appears to be causal. The evidence does not advocate lower level of economic freedom in former East German districts or greater economic freedom in West German districts. However, the evidence unveils North-South institutional gap which possibly accounts for per capita income gaps within Germany.Electoral Law Enforcement, Political Institutions, and Long-Run Development: Evidence from Latin America, 1800-2012
Abstract
This paper exploits the variation in the timing of electoral law enforcement across nine Latin American countries to consistently examine the contribution of de jure and de facto political institutions to long-run development. The set of novel measures of electoral law enforcement is constructed focusing on de jure vs. de facto suffrage extension, abolition of wealth- and literacy-based voting restrictions, electoral fraud and oppression drawing on the extensive and largely unexploited Latin American historical bibliography. A simple difference-in-differences model of de jure and de facto institutional development is built to account for the effect of electoral law enforcement on institutional development, and used as a source of variation in long-run development paths. The evidence suggests the timing of enforcing electoral laws largely accounts for the contrasting paths of de jure and de facto institutional development in post-independence Latin America. The institutional changes toward suffrage extension, removal of voting restrictions and level-playing field with more inclusive de jure and de facto institutional setup are associated with large-scale improvements in long-run development paths. The effects of de jure and de facto institutions on long-run development do not depend on sample selection, specification bias or unobserved heterogeneity. The counterfactual scenario suggests having de jure and de facto political institutions on a similar level to the United States since independence would yield massive economic gains by narrowing Latin America’s gap behind the U.S by a fifth. The counterfactual based on the institutional parallels of the U.S, Australia or United Kingdom in appears to speak in favor of large-scale gains in long-run development compared to the much smaller gains from the institutional design based on French, Spanish or Portuguese institutional benchmark.One Mandarin Benefits the Whole Clan: Hometown Favoritism in an Authoritarian Regime
Abstract
We study patronage politics in authoritarian Vietnam, using an exhaustive panel of ranking officials from 2000 to 2010 to estimate their promotions’ impact on infrastructure in their hometowns of patrilineal ancestry. Native officials’ promotions lead to a broad range of hometown infrastructure improvement. Hometown favoritism is pervasive across all ranks, even among officials without budget authority, except among elected legislators. Favors are narrowly targeted towards small communes that have no political power, and are strengthened with bad local governance and strong local family values. The evidence suggests a likely motive of social preferences for hometown.JEL Classifications
- O4 - Economic Growth and Aggregate Productivity