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he imposed some very specific institutional change in these places so one can reasonably code a 0 1 variable for whether a specific city had abolished guilds or had imposed equality before the law that is adopted the napoleonic code or allowed redemption of feudal lands there is natural variation across german cities in when or if these institutional changes took place based on napoleon s activity this empirical set up is drawn from acemoglu cantoni and robinson the binary indicators are fine as they are but ks then do a bad thing and average these measures regular readers of this blog know how i feel about arbitrary indexes of institutions and averaging creates an arbitrary index their main specification averages the first two guilds and legal equality this effectively presumes that abolishing guilds and legal equality have precisely the same effect a city that abolished guilds but did not adopt legal equality has an institutional level exactly equal to one that did not abolish guilds but did adopt legal equality why should this be identical in effect these are clearly not institutional substitutes they potentially have wildly different effects on economic activity if you want to use different measures of institutions in this kind of study then you should incorporate these measures separately in your regressions that gripe aside what do ks do first they realize that if they just regress city population growth on their institutional measure and their measure of price gaps then this is subject to all sorts of objections regarding endogeneity and omitted variables so ks come up with instruments they use a dummy for french rule to instrument for institutions as only those places conquered by napoleon necessarily adopted the institutional reforms this is also the acemoglu et al strategy they then use a geographic measure of the slope of terrain surrounding a city as an instrument for market integration this is because the cost of shipping by rail increases with the slope of the terrain gravity is a bitch they make an argument that both french rule and the slope characteristics are exogenous to city population growth and serve as valid instruments they re using iv so you could also chuck rocks at the instruments and claim they don t work if you re going to do that you need to have some plausible story for why the iv s aren t exogenous i don t have a good story like that so i m going to take their iv strategy as solid what do they find they find that city population is significantly and negatively related to market integration price gaps and insignificantly but positively related to institutions cities that had smaller price gaps with other cities and so were more integrated into the wider economy experienced more rapid city population growth over the 19th century cities with better institutions may have had higher city population growth but the evidence is too noisy to know for sure for future reference their 2nd stage regression has an r squared of 68 which includes the impact of city and year fixed effects the regression also predicts 73 of the actual city growth in the mean city so they have what i would consider a lot of explanatory power although a bunch could just be due to fixed effects here is where i start to get confused by the paper i look at this and think looks like institutions at least the abolition of guilds and the napoleonic code didn t have a big impact on city growth holding those institutions constant more integrated cities grew faster but ks seem determined to find an interpretation of these results that preserves the primacy of institutions as an explanation for growth they take this result and say it does not tell us about the relative importance of institutions meaning those two or three very specific institutions of guild abolition legal equality and feudal redemption they argue that what you should really be doing is not looking at the lack of significance on institutions in this regression but do some different counter factuals so they do two different regressions they regress city population growth on market integration only with market integration instrumented by only the geography instruments this is their mechanisms model and it is intended to capture just the pure effect of market integration that specification yields an r squared of 49 and predicts 44 of actual city growth in the mean city again these numbers include any influence of the city and time fixed effects so this isn t all due to market integration they then do the mirror image of this they regress city population growth on institutions instrumented with only the french rule instrument this is their institutions model and is intended to capture the pure effect of institutions that gives them an r squared of 15 and predicts 13 of actual city growth in the mean city again these numbers reflect the explanatory power of institutions and the city and time fixed effects unsurprisingly both of these separate regressions have less explanatory power than the combined specification but it sure seems as if market integration is far more important that institutions doesn t it the r squared is 49 versus 15 and remember that those both include the explanatory power of the city and time fixed effects so it could well be that the explanatory power of institutions was zero and the explanatory power of market integration is like 34 this is knowable by the way and i d suggest they report the partial r squared s in the paper ks press on though to keep institutions a central part of the story they argue that we should view institutions as fundamental and that institutions led to market integration which led to further growth in support of this they use their first stage results from the main specification this shows that market integration is significantly related to both the french rule dummy and the geographic variables affecting rail costs on the other hand the institutions measure is only significantly related to the french rule dummy from this they conclude that institutional change led to gains in the integration of markets but market integration did not at least in the short run affect institutions institutions are more fundamental so to speak i don t think this follows from those first stages market integration is related to the french rule dummy which is not a measure of institutions it is a measure of whether the french ever ruled that particular city it captures everything about french rule not just those three particular institutional reforms it captures in part whether napoleon thought the city was worth taking over and i would venture to guess this depended a lot on whether the city was well connected with the rest of germany he needed to move troops around so cities that were already well integrated to other areas via roads would be particularly attractive the french rule dummy does not tell me that institutions matter for market integration they tell me that places conquered by napoleon were better connected to other cities i m not sure why it is so crucial to establish that these particular institutions in this time frame were important for growth ks have a really cool paper here with an impressive collection of data an interesting time period to analyze and a lot of results that stand up by themselves as interesting facts why shove it through the pin hole of institutions i think ks could have easily written this paper as evidence that market integration matters more than the three institutions they study and that would be okay it doesn t mean institutions don t matter for growth it means that guild abolition legal equality and feudal redemption were not important for growth that leaves approximately an infinity of other institutions that could be important for growth given the ambiguous definition of institution market integration is an institution itself even if it depends on gasp geography eliminating some institutions as relevant would be helpful at this stage as the literature has to this point miraculously found that every single institutional structure studied really matters for growth have we reached the point where publication requires finding each and every single institution relevant for growth share this share on x opens in new window x share on facebook opens in new window facebook share on reddit opens in new window reddit email a link to a friend opens in new window email like loading posted in uncategorized tagged development empirics history institutions 1 reply do you have to choose growth or development part deux posted on april 11 2015 by dvollrath 10 note the growth economics blog has moved sites click here to find this post at the new site in my last post i talked about lant pritchett s recent article which questioned the focus of the world bank on only the extreme poor he wondered whether the bank was the right partner for developing countries hoping to grow to middle or high income living standards i agreed with pritchett that poverty alleviation efforts are not capable of generating what we might consider transformative growth meaning significant convergence towards rich countries i got a lot of very thoughtful responses to that post and one or two unhinged ones one response came from emre ozaltin who had written an earlier reply to pritchett emre pointed out on twitter some research showing that health improvements had accounted for 11 of growth in a set of developing countries suggesting that this means poverty alleviation efforts do lead to growth twitter just isn t sufficient to make a coherent reply so here we go even if health interventions really were responsible for 11 of growth in developing countries that is not the same thing as saying that health interventions can create fundamental economic development consider the figure which shows the time path of gdp per capita in the u s south korea and tanzania from 1950 to 2010 in 1960 south korea and tanzania are roughly equivalent in living standards they are both far poorer than the u s by a factor of about 10 to 1 in the subsequent decades though south korea and tanzania have entirely different experiences south korea has transformative growth and the u s is ahead of south korea now by a factor of 1 5 to 1 in contrast tanzania doesn t experience much overall growth at all and the u s is ahead by a factor of 42 to 1 when i talk about and study economic development i mean the study of what caused south korea to make that dramatic leap to rich country status what will promote that transformation in poor countries there is no evidence that health or education interventions could be the answer to that question when emre is talking about health generating growth he is talking about the contribution of health to that mild growth seen in the last twenty years or so in tanzania yes there was growth yes health interventions were maybe responsible for 11 of that growth but that growth has not been sufficient to do anything to transform tanzania into the next south korea it doesn t mean that these efforts were a waste or should be stopped there is no binary choice between poverty alleviation and promoting transformative growth i believe firmly that from a humanitarian perspective we should act to alleviate the conditions of poverty in these countries as much as possible at the same time we should also be doing what we can to promote the transformation of these economies so that they take off in the way south korea did i think pritchett is worried that the bank is ignoring transformative growth in favor of focusing only on poverty alleviation and i agree with him in general that one should not abandon promoting transformative growth but i don t know that we should worry specifically if the world bank changes its focus from the world bank perspective if they do want to focus on poverty alleviation mazel tov but do not claim that this is because it is a more robust way to generate fundamental economic development or because you have somehow seen the light you are making a distinct choice to focus on the humanitarian aspect of development and ignore the promotion of transformative growth share this share on x opens in new window x share on facebook opens in new window facebook share on reddit opens in new window reddit email a link to a friend opens in new window email like loading posted in uncategorized tagged beating dead horses development growth 10 replies do you have to choose growth or development posted on april 7 2015 by dvollrath 8 note the growth economics blog has moved sites click here to find this post at the new site a number of posts comments have been floating around the last few days that deal with the goals or the world bank lant pritchett published a piece that asks whether rich countries are in fact good partners for poor countries looking to develop pritchett is worried that rich country development agencies including the world bank have altered their focus from promoting overall economic development and defined development down to be only about alleviating the conditions for the extremely poor those earning less than 1 per day pritchett suggests that the reason for this is a post materialist attitude within rich countries more crudely you could say that this is another example of rich countries attempting to impose their goals values hopes onto developing countries we in rich countries in general and most likely highly paid development agency workers specifically have the luxury of saying that material economic growth is not that important pritchett argues that this is to ignore the goals values hopes of actual people in those developing countries who very much would like some material economic growth please i m very much on pritchett s side on this with a caveat i ll get to later in the post i wrote a post back when i started this blog on defining development economics i contrasted development economics with the economics of poverty development economics to me is the study of what allows countries to shift from poor agricultural rural economies to rich industrial urban economies it is development economics in a classic sense but today you d probably call it growth economics or macroeconomic development the economics of poverty is about the constraints facing poor people in un developed economies how they cope with those constraints organically and what kind of interventions will alleviate these constraints the problem is that what i call the economics of poverty is what everyone else calls development economics field studies and surveys in poor countries running randomized control trials of interventions and the like pritchett is arguing in my mind for the world bank to return to thinking about growth economics or about development in the classic sense looking for projects like ports roads energy generation and the like scale intensive activities that need someone to coordinate the investment and investments that 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