The Link Between Fundamentals and Proximate Factors in Development

The paper introduces a framework for studying the hierarchy of growth factors, from deep to more immediate. The speci…c setting we examine is 18th and 19th century Germany, when institutional changes introduced by reforms and transportation improvements converged to create city growth. We assess the impact of institutions on growth by allowing two ways for institutions to a¤ect growth. Institutions can directly a¤ect growth, or it can impact on trade, which in turn a¤ects growth. Once we separately quantify the link from institutions to trade, and trade to growth, the independent e¤ect of institutions on growth is small. This suggests that part of what is often understood as trade’s e¤ect on growth can be attributed to institutional change. It is straightforward to apply this framework to other settings. We thank Ran Abramitzky, Daron Acemoglu, Lee Alston, Sascha Becker, Johannes van Biesebroeck, Dan Bogart, Holger Breinlich, Anca Cristea, Price Fishback, Rainer Fremdling, Walker Hanlon, Vernon Henderson, Beata Javorcik, Ed Leamer, Nathan Nunn, Kevin O’Rourke, Je¤ Williamson and audiences at Berkeley, Colorado, Cliometrics, CURE, ERWIT, Harvard, NBER, Oregon, Oxford, Philly Fed, UC Irvine, UCLA, UC Santa Cruz, WTO, and Yale for useful comments. Thanks go as well to Michael Kopsidis and Jochen Streb for providing us with data. David Silver and Austin Smith provided excellent research assistance. NSF support under grant numbers SES 0453040 and SES 1124426 is gratefully acknowledged. yHoover Institution, 435 Galvez, Stanford, CA 94305; [email protected] zHoover Institution, 435 Galvez, Stanford, CA 94305; [email protected]