DEPARTMENT OF ECONOMICS UNIVERSITY OF COPENHAGEN PhD thesis Jeanet Sinding Bentzen Why are Some Countries Richer than Others? Cross -Country and Cross-Regional Empirical Studies Academic advisors: Carl-Johan Dalgaard and Thomas Barnebeck Andersen Submitted: October 11, 2011 Contents Acknowledgements 1 Evaluation committee 2 Summary 3 Resumé (Summary in Danish) 6 Chapter 1 9 Lightning, IT Diffusion and Economic Growth across US States Thomas Barnebeck Andersen, Jeanet Sinding Bentzen, Carl-Johan Dalgaard, and Pablo Selaya Review of Economics and Statistics, forthcoming Chapter 2 79 Religious Orders and Growth through Cultural Change in Pre-Industrial England Thomas Barnebeck Andersen, Jeanet Sinding Bentzen, Carl-Johan Dalgaard, and Paul Sharp Chapter 3 131 How Bad is Corruption? Cross-Country Evidence of the Impact of Corruption on Economic Prosperity Jeanet Sinding Bentzen Review of Development Economics, forthcoming Chapter 4 157 Does the Internet Reduce Corruption? Evidence from U.S. States and across Countries Thomas Barnebeck Andersen, Jeanet Sinding Bentzen, Carl-Johan Dalgaard, and Pablo Selaya The World Bank Economic Review, forthcoming Acknowledgements I sincerely thank my supervisor, coauthor, and friend, Carl-Johan Dalgaard, for great support throughout my entire thesis and extremely enjoyable collaboration of which I have learnt so much. Carl-Johan has been excellent at taking my ideas and opinions seriously, guiding me on my way to becoming a critical researcher, and inspiring me tremendously within the field of Growth Economics. I also thank my second supervisor and coauthor, Thomas Barnebeck Andersen, for great support and collaboration and for always sharing his honest opinions about my ideas. Also a great thank to my remaining two coauthors, Paul Sharp and Pablo Selaya, for a truly enjoyable collaboration. Without all of my four coauthors, my PhD thesis would probably have been somewhat lonely and I would certainly not have obtained half the knowledge that I possess today about structuring my arguments, writing good papers, and doing convincing empirical work. I have indeed benefited from the social and academic life here at the Department of Economics in Copenhagen. In particular, I thank all members of our Macro Reading Group for great discussions and fun afternoons and evenings at Krut’s Karport. I also thank my office mate and friend, Asger, for pleasant days in the office and for hopefully productive discussions about ideas for future papers. I thank the rest of my colleagues at the Department of Economics for providing such a pleasant environment, including the always so cheerful and helpful administrative staff. During the writings of my PhD thesis, I spent one semester at Universitat Pompeu Fabra in Barcelona, attending some truly great PhD courses. In particular, I thank my friends there for great discussions and hospitality, Joachim Voth for his excellent course “Research Seminar: Economic History”, which was of great inspiration to me, and Antonio Ciccone for productive discussions. I thank my husband, Christian, for invaluable loving support and for always pointing me back on track when I stumble. Last, I thank my little Oskar for making me laugh every day. Jeanet Sinding Bentzen Copenhagen, October 2011 1 Evaluation committee Sascha O. Becker, The University of Warwick David Dreyer, University of Copenhagen Mark Gradstein, Ben-Gurion University of the Negev 2 Summary Why are some countries richer than others? An immediate answer is that they invest more and innovate or adopt more new technologies. But why do some countries then invest more and experience more technological progress? The economic literature agrees on three deeper factors: Institutions, culture, and geography. The idea is that some countries have set up institutions that create better environments for investments and technological progress, or that some countries were simply enriched with a culture or a geography that created such a productive environment. With my PhD dissertation, I set out to explore subsets of these causes empirically. My main method is cross- sectional empirical analysis. The cross-sectional unit varies from countries to states or counties within one country. The latter has the advantage of being more likely to satisfy the “all-other-things-equal” assumption, but also the disadvantage of perhaps not being able to extend the conclusions to the World. My dissertation consists of four chapters, which are all independent journal articles, described briefly below. Chapter 1 “Lightning, IT Diffusion and Economic Growth Across US States” (joint with Thomas Barnebeck Andersen, Carl-Johan Dalgaard, and Pablo Selaya) shows that since the 1990s, growth across US states has become more and more sensitive to a specific (perhaps at first glance, peculiar) climatic phenomenon; lightning. US states with more lightning experience lower growth rates of GSP per capita. Before the 1990s, there was no relation between the two. We show that this increased sensitivity towards lightning is not because lightning has increased over time, nor is it because lightning is correlated with another natural phenomenon exhibiting this pattern, and finally not because lightning is correlated with another important growth determinant that follows this pattern. Instead, we argue that it is because of the emergence of the Internet in 1991 and the following increased importance of digital technologies for the economy. Computer chips inherent in all IT capital are highly sensitive towards shocks to the electricity supply and more and more so as computers get smaller and smaller. Lightning activity can cause such shocks, a problem acknowledged by engineers, private sector firms, and the like. Consumers can buy surge protectors, which increases the user cost of IT capital. We show empirically that US states with more lightning undertake significantly fewer IT investments, which results in significantly lower growth of GSP per capita across US states. We conclude that this increasing macroeconomic sensitivity to lightning may be due to the increasing importance of digital technologies for the growth process. Chapter 2 entitled “Religious Orders and Growth through Cultural Change in Pre-Industrial England” (joint with Thomas Barnebeck Andersen, Carl-Johan Dalgaard, and Paul Sharp) investigates another 3 determinant of long run productivity, namely culture. We go back to the roots of Protestantism, specifically to a group of Monks, who are said to be early proponents of Protestantism; the Cistercians. The Cistercians were known for their high work ethics and thrift, values usually associated with Protestantism. Indeed, we show that regions with more Cistercians are more likely to possess values of hard work and thrift today. We set out to test whether these values were beneficial for growth, as argued for by Max Weber. We show that English counties with more Cistercian Monasteries as a share of total Monasteries experienced higher population densities (a measure of prosperity in the Malthusian era) over the period 1377-1801. This finding is robust to accounting for various geographic features important for development, the remaining Monk Orders, regional effects, potential endogeneity of the location of Cistercian Monasteries and potential other explanations such as trade, technology adoption and human capital. We conclude that the Cistercian monks spread a culture to the surrounding society, which created growth advantages, even long after the dissolution of the monasteries. Chapter 3, “How Bad is Corruption? Cross-Country Evidence of the Impact of Corruption on Economic Prosperity”, investigates a third determinant of prosperity differences; corruption. I set out to identify the impact of corruption on GDP per capita across countries. The relation is potentially spurred by endogeneity; richer countries have more resources to combat corruption (reverse causality) and omitted factors are likely to influence both corruption and GDP simultaneously (omitted variables bias). I suggest to instrument corruption using specific cultural values as instruments. The idea is that cultures with more focus on the social group compared to the individual and cultures that emphasize more hierarchical power structures resulting in less questioning towards the people in power, will experience more corruption, since the corrupt rulers are faced with lower risks of getting caught and with higher benefits of being corrupt. I show that the cultural values Individualism and Power Distances (measured in the 1960s) are strong instruments for corruption in a regression on GDP per capita. The OID test also cannot reject that corruption is the only channel through which these particular culture dimensions influence GDP per capita. But the test is of low power and I attempt to fulfill the exclusion restrictions by tying my hands as much as possible when including the remaining determinants of GDP per capita; geography and the remaining dimensions of institutions and culture. I find that Individualism and Power Distances remain strong instruments for corruption and that corruption does indeed exert a negative significant influence on GDP per capita. Chapter 4, entitled “Does the Internet Reduce Corruption? Evidence from U.S. States and across Countries” (joint with Thomas Barnebeck Andersen, Carl-Johan Dalgaard, and Pablo Selaya), explores corruption further by investigating one potential means through which to get rid of corruption; the Internet. The Internet increases the costs