The Link Between Fundamentals and Proximate Factors in Development
We examine the role of trade for the impact of institutions on growth. The paper finds that in 19th century Europe, institutional reform improved trade. Another channel that benefited trade was the introduction of steam trains, and institutional reform contributed there as well by making it more likely that railways were run privately, where trade gains were larger than for state-run railways. The main result of the paper is that once we have modeled the institutions impact on growth through trade, there is no other impact of institutions. The approach outlined in this paper is also suitable for studying the link between fundamentals other than institutions and their proximate growth factors.
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