10.14754/CEU.2017.08 HISTORY AS AN AGENT OF GROWTH: NATURAL EXPERIMENTS FROM CENTRAL EUROPE by Bálint Menyhért Submitted in partial fulfillment of the requirement for the degree of Doctor of Philosophy at Central European University Advisor: Miklós Koren CEU eTD Collection Budapest, Hungary Copyright by Bálint Menyhért, 2017 All rights reserved 10.14754/CEU.2017.08 CEU eTD Collection 10.14754/CEU.2017.08 CEU eTD Collection ii 10.14754/CEU.2017.08 DISCLOSURE OF CO-AUTHORS CONTRIBUTION Title of paper: Ideas off the Rails: Railroads and Institutional Development in the Austro-Hungarian Monarchy Co-author: Miklós Koren The nature of cooperation and the roles of the individual co-authors and approximate share of each co- author in the joint work are the following. The basic idea for the paper came from Miklós with the intention to make good use of the township-level data from 19th-century Hungary I had previously collected for the other two chapters in this dissertation. The collection of chapter-specific data (on railroads, cultural institutions and the telegraph network etc.) was carried out by myself and hired statistical assistants supported by the ERC Starting Grant entitled “Channels and Consequences of Knowledge Flows from Developed Economies to Central and Eastern Europe”. The drafting and empirical analysis of the paper was carried out by myself, with guidance and approval from Miklós. CEU eTD Collection iii 10.14754/CEU.2017.08 Abstract This thesis consists of two single-authored and one co-authored chapters that are independent yet related. Each chapter investigates a specific societal or cultural driver of economic devel- opment in the historical context, using a unique, hand-collected dataset of more than a 1000 townships from historical Hungary of the 1869-1910 period. My research demonstrates the persistent influence of culture on economic outcomes, and also highlights the wealth of acces- sible and unexplored historical data for Central Europe. Chapter 1 is my job market paper. It studies the effects of population mixing on economic growth in the Austro-Hungarian Monarchy, the most diverse country formation in modern Eu- ropean history. Based on the aforementioned self-compiled dataset, I find that ethnically and religiously diverse townships grew up to 20-60% faster in the 1880-1910 period than their ho- mogeneous neighbors. These results are based on three different methodologies. First, OLS regressions take advantage of the largely random geographical patterns in diversity as a natu- ral experiment. Second, endogeneity concerns are addressed by a novel IV strategy based on townships’ previous exposure to warfare, using self-compiled data of more than 2000 military events dating back to the 15-17th centuries. Third, to understand the mechanism through which diversity translated to higher economic growth in an era of rapid industrialization, I develop a simple growth model that highlights the potential trade-offs between comparative productivity advantages and reduced knowledge spillovers diverse communities are likely to face. Empirical tests of the model’s predictions confirm that diversity led to more diversified local economies, industrial sorting along ethnic and religious lines, as well as higher employment concentration in productive industries. Chapter 2 proposes a new explanation for the historical source of Protestant economic pros- perity based on the reformed institution of marriage and the modern family. Specifically, I argue that Calvin’s insistence on spousal duty to love one another, rationalize the household, and ed- ucate children for the glory of God was instrumental in the emergence of the child-centered nuclear family and subsequent economic growth. The empirical analysis of the paper, based on the referenced township-level dataset from historical Hungary, confirms the economic progres- siveness of puritan Calvinists relative to their Catholic or Lutheran neighbors, and attributes it to observed differences in marriage patterns, household size and fertility rates, both before and during the demographic transition. A simple model predicts that lower exogenous fertility preference can lead to higher per capita income when factors of production are fixed, consistent with the historical evidence of less crowded and fragmented use of agricultural land in Calvin- ist places. Chapter 3 is a joint work with Miklós Koren. It studies the effects of railway roll-out on the spread of ideas and institutions in 19th-century Hungary. Specifically, we find that cultural CEU eTD Collection commodities such as civil organizations, libraries, press outlets, coffee houses and theaters were highly concentrated in townships that had been connected to the railway network, to a much larger degree than what economic fundamentals would imply. By employing a series of different econometric approaches, we are able to identify railroads as important capillaries of institutional development. These results can serve as a starting point for developing and testing a simple model of behavioral contagion where the spatial characteristics of the railway network are explicitly accounted for, as well as for quantifying the effects of institutional development on economic growth at the local level. iv 10.14754/CEU.2017.08 Chapter 1 “Economic Growth Spurred by Diversity: Evidence from the Austro-Hungarian Monarchy" Mixed populations and diverse societies are a salient yet not very well understood aspect of present-day economic development. This chapter provides valuable contributions in this regard by studying the effect of ethnic and religious diversity on economic growth in the historical context, using self-compiled data from the Austro-Hungarian Monarchy (1867-1918), the most diverse country formation in all of modern Europe. The empirical analysis in the chapter contains three different yet closely related measure- ment strategies. First, I take direct advantage of the largely random geographical variation in diversity as a natural experiment and estimate the growth difference between diverse and non- diverse places with OLS. While diversity is typically endogenous to economic development, the weak statistical relationship between diversity and observable township characteristics in the pre-industrialization period suggests that the standard issue of migration-based reverse causal- ity is of limited importance in the current context. Regression estimates suggest that diverse townships grew up to 20-60% faster during the 1880-1910 period than their homogeneous neighbors, a result corroborated by a wide range of robustness checks. To address the issue of unobserved heterogeneity across townships, I then present diversity estimates based on two different IV strategies. The first uses past diversity as of 1720 as an in- strument and thus disregards the potentially endogenous effects of mass population movements of the 18th century. The second approach is truly novel and exploits warfare as a genuine his- torical driver of local-level diversity. Standing at the crossroads between Western and Eastern civilizations, Hungary was exposed to continuous warfare for centuries that set off migration movements and population mixing of an unparalleled magnitude. Based on a self-compiled unique dataset of more than 2000 documented war events from 1391-1718 Hungary, I specif- ically use the number of military events in a township as an IV for diversity. The resulting 2SLS estimates and reduced-form coefficients confirm the important causal role of diversity in driving economic growth differences between townships. Finally, to understand the mechanism through which diversity translated into higher growth during an era of rapid industrialization, I propose a simple model of industrial selection that fea- tures the potential trade-offs between comparative productivity advantages and reduced knowl- edge spillovers diverse communities are likely to face. It implies that, while individuals in diverse places tend to face higher entry costs when making their occupational choice due to non-communication between groups, they may also capitalize on group-specific productiv- ity advantages to earn higher wages. Empirical tests of the model’s predictions are based on township-level statistics on workers’ distribution across economic sectors and industries from CEU eTD Collection 1900 and 1910. These confirm that the benefits of diversity outweighed its costs, and diverse places developed more complex local economies due to ethnic and religious sorting, and con- centrated employment in more productive industries. These findings challenge the dominant view in the literature that social diversity is detri- mental to economic development, and show that productivity differences may lead to economic gains even for antagonistic groups. My results also emphasize the previously overlooked cen- tripetal role played by diverse communities in market integration and industrial development in the Austro-Hungarian Monarchy. v 10.14754/CEU.2017.08 Chapter 2 “What’s Love Got to Do with It? The Modern Family and Its Importance for Protestant Economic History" What are the historical sources of Protestant communities’ relative economic prosperity? Max Weber’s thesis about the role of ascetic religiosity in the emergence of modern capitalism offers the most famous explanation, while recent studies have given prominence to literacy and public good provision. Not only are the proposed channels largely incompatible with one another, the robustness of their economic consequences is also disputed.