Does Greater Economic Freedom Foster Economic Growth? District-level Evidence from Germany

Aleksandar Keseljevic (University of Ljubljana - Laibach)
Rok Spruk (University of Ljubljana - Laibach)

Abstract : In this paper, we revisit the relationship between economic freedom and growth using the sub-national variation in fiscal and economic 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 productivity growth. The beneficial effect of economic freedom on growth is robust to the variety to exclusion restrictions and to numerous specification checks. 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 increase above the median. 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 a persistent North-South institutional gap which possibly accounts for per capita income gaps within Germany. In the counterfactual scenario, moving the level of economic freedom to the 90th percentile is associated with large-scale gains in district-level per capita income and growth rates

Land Ownership and Development: Evidence from Postwar Japan

Shuhei Kitamura (University of Rochester)

Abstract : This paper analyzes the effect of land ownership on technology adoption and structural transformation. During a historically large-scale land reform in post-war Japan, the ownership of farm plots was redistributed from landlords to tenants who had cultivated the land and many tenant farmers became landowning farmers. I find that agricultural technology which became available after the reform tended to spread more quickly into municipalities that had the high share of owner farmers. Moreover, I find that the adoption of the labor-saving technology alleviated mobility constraints, and led to out-migration of young population from rural areas to urban areas when urban sectors required more low-cost labor. Finally, simulation results show that land reform and technology adoption had a large effect on economic growth by fostering the growth of urban sectors through labor reallocation and by increasing agricultural productivity through capital-labor substitution, although the most of the effect is explained by the urban development.

Explaining the Paths of Deindustrialization: a Transitional Institutional Dynamics Approach

Robbert Maseland (University of Groningen)
Rok Spruk (University of Ljubljana - Laibach)

Abstract : We examine the contrasting paths of deindustrialization across and within countries in a transitional dynamics framework. Our argument emphasizes that equilibrium income increases lead to the relative strengthening of transaction-cost reducing institutions. We specifically distinguish between three evolutionary equilibria: benchmark deindustrialization, premature deindustrialization and extended industrialization. Rising income from sources other than manufacturing below the TFP frontier tends to suppress transaction costs, encourage service-intensive specialization, and lead to premature deindustrialization. Our framework predicts the level of industrialization drives the choice of institutional framework. In more tangible-asset environment, property-rights strengthening institutions arise as the agents in such environment disproportionately favor secure long-term investments. Our identification strategy is to use industry-level panel data to identify the transition paths towards industrialization equilibria using the variation in transaction costs and property rights to identify the structural shifts between benchmark deindustrialization, premature deindustrialization and extended industrialization.We show that countries with the most rapidly decreasing transaction costs at the low levels of industrialization are more prone to deindustrialize prematurely compared to the countries with greater advantage in secure property rights and with relatively higher transaction costs.