The Price of Decentralization: Linguistic Polarization and the * Provision of Schooling *** Preliminary version – please do not cite or circulate without the authors’ permission *** Francesco Cinnirella† and Ruth Maria Schueler§ Abstract In this paper we argue that the decentralization of education policies in Prussia resulted in under- provision of public education in areas characterized by conflicting and divergent interests. Using rich county-level data on public schooling from the education census of 1886, we show that linguistic polarization in East Prussia had a negative effect on local school spending. We obtain this result while holding the municipal tax base, state expenditures, and the agricultural and industrial structure constant. Instrumental variable estimates using distance to the eastern border and the geography of Prussian annexations suggest that the negative relationship between linguistic polarization and public expenditure on education can be interpreted as causal. Our findings suggest that linguistic polarization has a negative effect on local school spending, which results in fewer teachers and school buildings as well as lower teacher wages. Keywords: human capital, polarization, public goods, decentralization, Prussia. JEL classification: N130, N330, H410, I220 July 31, 2015 * We are grateful to Sascha O. Becker, Pawel Bukowski, Luigi Pascali, Rita Peto, Ralf Meisenzahl, Stelios Michalopoulos, Alfred Reckendrees, Justin Tumlinson, Nikolaus Wolf, Ludger Woessmann, and the participants of the Economic History Talk in Mannheim, at the European Historical Economics Society Summer School in Berlin, the First German Economic History Congress in Muenster, the Conference of the Association for Religion, Economics and Culture in Boston, and at two internal seminars at the Ifo Institute for their comments and suggestions. † Ifo Institute for Economic Research at the University of Munich, Poschingerstr. 5, 81679 Munich, Germany; [email protected]. § Ifo Institute for Economic Research at the University of Munich, Poschingerstr. 5, 81679 Munich, Germany; [email protected]. 0 1. Introduction Nineteenth-century Prussia is well-known for its advanced educational system. For example, by 1816, the average enrollment rate in primary school was already about 65 percent. In 1871, the share of persons older than 10 years old able to read and write was about 70 percent. Protestantism is believed to be a crucial factor in this country’s high level of human capital (Becker and Woessmann 2009), a belief bolstered by the high levels of literacy in economically poor but highly Protestant Sweden in the 19th century. From a political economy perspective, Lindert (2004) convincingly argues that the success of the Prussian education system was mainly due to its high level of decentralization, which allowed it to respond more efficiently to a local demand for education. At an early stage of development, highly centralized systems, in contrast, would be unable to detect the local demand for education and therefore tend to under-provide public primary education (Hanushek et al. 2013). In this paper we argue that for a given demand for education related to the economic structure, a highly decentralized educational system may result in a comparatively lower spending on primary education in presence of a heterogeneous population. We argue that the comparatively low educational performance of the Prussian eastern provinces can, to a large extent, be ascribed to the linguistic heterogeneity of those areas. More specifically, we hypothesize that the divergent interests of different linguistic groups prevented reaching a consensus on local expenditure on primary education. The eastern part of Prussia had always been a melting pot of German and Slavic culture and the foundation of the German Reich in 1871 fueled national feelings on both sides. Becoming part of a German state increased the minority’s awareness of its own ethnic identity and exacerbated conflicts of interest. We use language as a salient measure for diversity as language policy played a major role in the Germanization policy of the Prussian state and because linguistic identity was the only ethnic identifier that Prussian statistical authorities provided (Heinrich 1992a). As school policy played a major role in the enforcement of Germanization policies, we look at the provision of public school funds as a means of investigating the effect of diverging interests. As decisions on school funding were taken at the municipal level, that is, by the local school boards, we expect there to be conflicts over the provision of public education in linguistically polarized counties. Using data from the first comprehensive education census of 1886, published by the Royal Statistical Office of Prussia, we show that the presence of two linguistic groups of similar size, that is, high polarization, led to lower expenditure on public primary education. Specifically, our 1 rich dataset allows us to look more deeply into the allocation of school funds and investigate the impact of linguistic polarization on school density, student-teacher ratios, and teacher wages. The educational census of 1886 provides a unique opportunity to study the impact of linguistic polarization on the local provision of public education as the state’s contribution to primary education was still very limited at that time. In fact, decisions on school funding were at the discretion of local authorities; no statewide law regulating school funds was passed until 1906 (Hühner 1998). We address the issue of causality using an instrumental variable approach. The arguably exogenous variation in polarization comes from the geography of the Kingdom of Prussia’s annexation policies. The successive annexations toward east, for example, the Partitions of Poland, increased the share of ethnic Polish in the population and thus the linguistic heterogeneity. Thus, each province’s distance to the eastern border is used to identify variation in linguistic polarization. Instrumental variable estimates confirm the negative effect of linguistic polarization on local expenditure on primary education. We find a substantial negative effect of polarization on primary education expenditure and one that affected several aspects of school-related spending, including school density, child-to- teacher and student-teacher ratios, and teacher salary. Therefore, we are able to shed light on why East Prussia underperformed in education and, consequently, in economic performance, as basic education played an important role in the Prussian industrial revolution (Becker et al. 2011). Our rich dataset allows us to rule out many possible confounding factors such as income, religious fractionalization, and urbanization. To measure income as accurately as possible, we collected new data on the municipal tax statistics of 1883/1884. We find that the negative impact of linguistic polarization on educational expenditure holds for a given level of economic prosperity as measured by municipal tax revenues. Accounting for the subsidiary role of the central state does not affect our main result either. Additional specifications illustrate the effect of linguistic polarization on other municipal obligations, chiefly infrastructure and poor relief. Consistent with the notion that linguistic polarization was detrimental only for education policies, we find no consistent effect of linguistic polarization on expenditure on infrastructure or on policies related to poor relief. The paper is structured as follows. Section 2 sets out the historical background of 19th- century Prussia. Section 3 surveys the literature. Section 4 describes the dataset. Section 5 presents OLS results. Section 6 presents the instrumental variable approach and its results. Section 7 establishes the falsification exercise. Section 8 examines distributional effects, and Section 9 concludes. 2 2. Historical Background 2.1 The Political Economy of Schooling in late 19th-Century Prussia In 1886, Prussia’s school system was still locally organized. According to (Lindert 2004), this state of affairs was largely responsible for the school system’s success. Indeed, Prussia’s high school- enrollment and literacy rates made it a role model for other European countries (Clark 2007). At the same time, however, the Prussian administration was aware that the school system in the East, and especially in those regions with a high share of Polish speakers, lagged behind the rest of the country in terms of student-teacher ratios and enrollment rates (Königliches Statistisches Bureau in Berlin 1889), largely due to low school-related investment. We argue that this area’s lower investment in the educational system might have stemmed from high linguistic polarization in these parts of Prussia, a situation itself exacerbated by local organization of the schooling system. The historical literature supports such a relationship by pointing out that municipalities with a linguistically mixed population suffered especially when it came to the provision of school buildings and teachers, explicitly mentioning the coexistence of languages as a reason for this situation (cf. (Grzes 1992); (Heinrich 1992b). Local organization of schooling meant that the local municipality was responsible for levying and allocating school funds (cf. (Lindert 2004; Heinrich et al. 1992; Lamberti 1989). In many places, provincial or even district legislation regulated school financing, but in the absence of such regional regulations, the Allgemeines