Findings

Global Developments

Kevin Lewis

October 30, 2024

Economic freedom and the quality of education
Horst Feldmann
Kyklos, forthcoming

Abstract:
This paper finds robust evidence that economic freedom improves the quality of education. This is probably mainly because economic freedom incentivizes parents to invest in high-quality education for their children and helps them to do so. It also incentivizes and helps both governments and private providers to deliver high-quality education. The paper uses two different indicators of educational quality: PISA scores and the World Bank's harmonized test scores. The magnitudes of the estimated effects of economic freedom on both indicators are substantial. They are even larger once the indirect impact of economic freedom via GDP per capita and, to a lesser extent, once the indirect impact via government education expenditure is taken into account. The paper uses data on up to 49 countries for PISA scores and up to 137 countries for World Bank scores. It accounts for the endogeneity of economic freedom and controls for all major determinants of educational quality.


Personal Bankruptcy Law and Innovation around the World
Douglas Cumming et al.
NBER Working Paper, August 2024

Abstract:
Because corporate limited liability protects founder’s personal assets, creditors often require founders of new, small and risky firms to contract around limited liability by pledging their personal assets as collateral for loans to their firms. This makes personal bankruptcy law (PBL) relevant to corporate finance. We find that pro-debtor PBL reforms increase the number of patents filed, citations to those patents, and début patents by firms with no previous patents. These reforms also redistribute innovation across industries in closer alignment to its distribution in the U.S., which we take to approximate industry innovative potential. These effects are driven by firms without histories of high-intensity patenting, and are damped in countries that impose minimum capital requirements on new firms. Firms with largescale legacy technology may avoid radical innovations that devalue that technology. Consequently, new, initially small and risky firms often develop the disruptive innovations that contribute most to economic growth. Consistent with this, we also find pro-debtor PBL reforms increasing value-added growth rates across all industries, and by larger margins in industries with more innovation potential. Our difference-in-differences regressions use patents and PBL reforms for 33 countries from 1990 to 2002, with subsequent years used to measure citations to patents in this period.


The Growth Effect of State Capacity Revisited
Trung Vu
Oxford Bulletin of Economics and Statistics, forthcoming

Abstract:
I provide new empirical estimates of the effect of state capacity on economic development across countries over the period 1960–2022. Specifically, I construct a comprehensive state capacity index based on six different dimensions of effective state institutions available in the Varieties of Democracy (V-Dem) dataset. Then, I estimate heterogeneous parameter models under a common factor framework. My empirical strategy explicitly allows the growth effect of state capacity to differ across countries and accounts for unobserved common factors. My preferred estimates indicate that a one-standard-deviation increase in my V-Dem-based state capacity index predicts a rise in income per person by roughly 6%–7%. The magnitude of such impact equates to less than half of that implied by conventional estimates obtained under highly restrictive assumptions of slope homogeneity and cross-sectional independence. Furthermore, I provide partial evidence suggesting that worldwide heterogeneity in the economic importance of state capacity is deeply rooted in prehistorically determined population diversity, state history, long-term relatedness between countries, and interpersonal trust.


The abolition of people’s communes and fertility decline in rural China
Shuo Chen & Bin Xie
Journal of Development Economics, January 2025

Abstract:
This study investigates the impact of the abolition of People’s Communes in the early 1980s on rural fertility in China. Exploiting the staggered implementation of agricultural decollectivization, we show that decollectivization led to a significant decline in rural fertility, independent of the impact of family planning policies. Counties with higher levels of egalitarianism during the commune period experienced a sharper fertility decline following decollectivization, indicating that the elimination of egalitarian income distribution is the key mechanism behind this fertility decline. We find no evidence supporting the alternative hypothesis that the fertility decline was primarily due to increased opportunity costs of childbearing associated with higher agricultural productivity after decollectivization.


Growth Off the Rails: Aggregate Productivity Growth in Distorted Economies
Richard Hornbeck & Martin Rotemberg
Journal of Political Economy, November 2024, Pages 3547-3602

Abstract:
We examine aggregate economic gains in the United States as the railroad network expanded in the nineteenth century. Using data from the Census of Manufactures, we estimate relative increases in county aggregate productivity from relative increases in county market access. In general equilibrium, we find that the railroads substantially increased national aggregate productivity. By accounting for input distortions, we estimate much larger aggregate economic gains from the railroads than previous estimates. Our estimates highlight how broadly-used infrastructure or technologies can have much larger economic impacts when there are inefficiencies in the economy.


Unveiling the mutual dynamics: Institutions, education and economic growth over 138 years in OECD countries
Tim Röthel & Martin Leschke
Kyklos, forthcoming

Abstract:
Many articles examine the effect of institutions and education on economic growth in growth models or empirical settings. However, the opposite effect of economic development on institutions and education is less researched. Systematic evidence is scarce when looking at the interplay of education and institutions. Most of the literature focuses on post-war evidence starting in the 1960s only. However, institutions and education, both, only change slowly over time and, thus, should be analysed over a longer period. In this article, we try to close a gap by examining the relationship between all three variables over 138 years. By estimating a vector error correction model for a sample of 20 Organisation for Economic Co-operation and Development (OECD) countries, we are additionally able to differentiate between short- and long-run results. We find positive effects of institutions and education on growth and vice versa. In contrast, institutions and education do not significantly affect each other. Our results are robust to several robustness tests and extensions.


A tale of tier 3 cities
Kenneth Rogoff & Yuanchen Yang
Journal of International Economics, November 2024

Abstract:
China's outsized real estate sector has long been a key engine of growth. However, with decades of construction at break-neck speeds having produced a massive increase in the quantity and quality of China's housing stock, the question arises as to whether diminishing returns are beginning to set in. At the same time, there is the question of whether real estate has been a major driver of today's high levels of local government debt, which may create heightened financial vulnerabilities. We investigate these questions using a new database that includes city level estimates of China's housing stock. Our formal statistical results suggest that real estate is indeed running into diminishing returns to growth while at the same time being a significant driver of local government debt, with both effects being driven mainly by China's smaller and less prosperous tier 3 cities (which nevertheless account for 60% of GDP).


Data transparency and growth in developing economies during and after the global financial crisis
Asif Mohammed Islam & Daniel Lederman
Kyklos, November 2024, Pages 1169-1205

Abstract:
The study explores the effects of data transparency on economic growth for developing economies over a unique time period - at the onset of the 2007–2009 global financial crisis and thereafter. Data transparency is defined as the timely production of credible statistics as measured by the statistical capacity indicator. The paper finds that data transparency has a positive effect on real gross domestic product per capita during a period of considerable uncertainty. The estimates indicate an elasticity of the magnitude of 0.03 percent per year, which is much larger than the elasticity of trade openness and schooling in the estimation sample. The empirics employ a variety of econometric estimators, including dynamic panel and cross-sectional instrumental variables estimators, with the latter approach yielding a higher estimated elasticity. The findings are robust to the inclusion of several factors in addition to political institutions and exogenous commodity-price and external debt-financing shocks.


Income effect of prenatal sunlight exposure: Empirical evidence from China
Guanghua Wan, Tongjin Zhang & Xiaoshan Hu
Health Economics, forthcoming

Abstract:
Despite a growing interest in the impacts of prenatal factors on adulthood quality of life, economists have not estimated the income effects of sunlight exposures by mothers during pregnancy. This paper estimates such effects using data from China General Social Survey and China National Meteorological Data Service Center. The results show that the income effects of prenatal sunlight exposure in the second trimester are significantly positive. The effects differ for individuals born in different months and the effects are larger for female employees, older employees, those born in rural areas, in the pre-reform period, or whose mothers are less-educated. Finally, we investigate the possible mechanisms via the human capital pathway, discovering that fetuses with longer sunlight exposure in the second trimester are healthier and do more exercises in adulthood. It is suggested that families, communities, policymakers should pay attention to prenatal sunlight exposure, especially for pregnant women in the developing world who are less educated or live in rural areas.


Regional Bombs and Firm Investment Decisions: Evidence from the Vietnam War
Thu Thanh Luu & Duong Phuong Thao Pham
Economics Letters, November 2024

Abstract:
This study examines the impact of historical bomb density on the investment decisions of Vietnamese firms, particularly in infrastructure. Employing an instrumental variable approach, this study examines the causal relationship between bomb density and tangible asset investments. The findings indicate that bomb density significantly influences these investments, with infrastructure quality and literacy rates as mediating factors.


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