We estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instrumental variables for institutions and trade. Our results indicate that the quality of institutions “trumps” everything else. Once institutions are controlled for, conventional measures of geography have at best weak direct effects on incomes, although they have a strong indirect effect by influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant, and often enters the income equation with the “wrong” (i.e., negative) sign. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.

We show that equity market liberalizations, on average, lead to a one percent increase in annual real economic growth over a five-year period. The effect is robust to alternative definitions of liberalization and does not reflect a business cycle effect. The channel of growth is both increased investment post liberalization which partially reflects a decreased cost of capital and increased factor productivity. The additional investment is largely financed by foreign capital leading to deteriorating trade balances. Some of the liberalization effect can be accounted for by coincidental macroeconomic reforms as well as financial development. However, our analysis shows that even after controlling for a broad range of variables, a statistically significant and economically important role is played by equity market liberalization. We appreciate the helpful comments of Wayne Ferson, Peter Henry, Ross Levine, Graciela Kaminsky,

Average incomes of the poorest fifth of society rise proportionately with average incomes. This is a consequence of the strong empirical regularity that the share of income accruing to the bottom quintile does not vary systematically with average income. In this paper we document this empirical regularity in a large sample of 92 countries spanning the past four decades, and show that it holds across regions, time periods, income levels, and growth rates. We next ask whether the factors that explain cross-country differences in growth rates of average incomes have differential effects on the poorest fifth of society. We find that several determinants of growth -- such as good rule of law, openness to international trade, and developed financial markets -- have little systematic effect on the share of income that accrues to the bottom quintile. Consequently these factors benefit the poorest fifth of society as much as everyone else. There is some weak evidence that stabilization from high inflation as well as reductions in the overall size of government not only raise growth but also increase the income share of the poorest fifth in society. Finally we examine several factors commonly thought to disproportionately benefit the poorest in society, but find little evidence of their effects. The absence of robust findings emphasizes that we know relatively little about the broad forces that account for the cross-country and intertemporal variation in the share of income accruing to the poorest fifth of society. _________________________ 1818 H Street N.W., Washington, DC, 20433 (ddollar@worldbank.org, akraay@worldbank.org). We are grateful to Dennis Tao for excellent research assistance. This paper and the accompanying dataset are available at www.worldbank.org/research/gro...

There are now over 125 empirical papers that analyze the process of enterprise restructuring in transition

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E conomic research on foreign aid effectiveness and economic growth fre-quently becomes a political football. But when a regression result is passedfrom one source to the next, context is often stripped away so that what the result means in public discussion is different than what the original research actually demonstrated. Consider the revealing episode of how an academic paper on foreign aid influenced actual foreign aid commitments. The story starts with an academic study by Burnside and Dollar (2000), which circulated widely as a working paper for several years in the late 1990s before publication in the high-profile American Economic Review. The authors set out to investigate the relationship between foreign aid, economic policy and growth of per capita GDP using a new database on foreign aid that had just been developed by the World Bank. They run a number of regressions in which the dependent variable of growth rates in developing coun-tries depends on initial per capita national income, an index that measures insti-tutional and policy distortions, foreign aid and then aid interacted with policies. To avoid the problems that aid and growth may be correlated over periods of a few years, but not on a year-to-year basis, they divide their sample into six four-year time periods running from 1970–1973 to 1990–1993. In certain specifications, they also include variables for ethnic fractionalization, whether assassinations occurred, dummy variables for certain regions and even a measure of arms imports. In many of their specifications, they found the interaction term between foreign aid and good policy to be significantly positive, and they summarized (p. 847): “We find

This paper surveys the trade literature on international technology transfer, paying particular attention to the role of foreign direct investment. A central question of interest is whether technologies introduced by multinationals diffuse to local firms. Major conclusions of theoretical models as well as the relevant empirical evidence regarding technology spillovers are discussed. The paper also discusses the potential impact of host country policies regarding trade, foreign direct investment, and intellectual property rights protection on international technology transfer.

This paper explores Colombian trade policy during 1977-1991, a period of substantial variation in protection across industries, to examine whether increased exposure to foreign competition generates plant-level productivity gains. Using a large panel of manufacturing plants, we find a strong positive impact of tariff liberalization on consistent productivity estimates, controlling for plant and industry heterogeneity. This result is not driven by the endogeneity of protection nor by plant exit. The impact of tariff liberalization on productivity is stronger for large plants and for plants in less competitive industries. Qualitatively similar results are obtained when using effective rates of protection and import penetration ratios as measures of protection.

There is still disagreement among economists concerning how a country's international economic policies and its rate of economic growth interact, despite a number of multi-country case studies utilizing comparable analytical frameworks, numerous econometric studies using large cross-country data sets, and important theoretical advances in growth theory. This paper briefly surveys this literature and points out the main reasons for the disagreements. Particular attention is given to an important study by Francisco Rodriguez and Dani Rodrik (2001) criticizing the conclusion of a number of recent multicountry statistical studies that openness is associated with higher growth rates. Rodriguez and Rodrik show that openness simply in the sense of liberal trade policies seems to be no guarantee of faster growth. However, the conclusion of most researchers involved in either country studies or multi-country statistical tests that lower trade barriers in combination with a stable and non-discriminatory exchangerate system, prudent monetary and fiscal policies and corruption-free administration of economic

We estimate the effect of international trade on average labor productivity across countries. Our empirical approach relies on summary measures of trade that, we argue, are preferable on both theoretical and empirical grounds to the one conventionally used. In contrast to the marginally significant and non-robust effects of trade on productivity found previously, our estimates are highly significant and robust even when we include institutional quality and geographic factors in the empirical analysis. We also examine the channels through which trade and institutional quality affect average labor productivity. Our finding is that trade works through labor efficiency, while institutional quality works through physical and human capital accumulation. We conclude with an exploratory analysis of the role of trade policies for average labor productivity.