This paper evaluates (1) whether the exogenous component of financial intermediary development influences economic growth and (2) whether cross-country differences in legal and accounting systems (e.g., creditor rights, contract enforcement, and accounting standards) explain differences in the level of financial development. Using both traditional cross-section, instrumental variable procedures and recent dynamic panel techniques, we find that the exogenous components of financial intermediary development is positively associated with economic growth. Also, the data show that cross-country differences in legal and accounting systems help account for differences in financial development. Together, these findings suggest that legal and accounting reforms that strengthen creditor rights, contract enforcement, and accounting practices can boost financial development and accelerate economic growth.

We document five stylized facts of economic growth. (1) The “residual ” rather than factor accumulation accounts for most of the income and growth differences across nations. (2) Income diverges over the long run. (3) Factor accumulation is persistent while growth is not persistent and the growth path of countries exhibits remarkable variation across countries. (4) Economic activity is highly concentrated, with all factors of production flowing to the richest areas. (5) National policies closely associated with long-run economic growth rates. We argue that these facts do not support models with diminishing returns, constant returns to scale, some fixed factor of production, and that highlight the role of factor accumulation. Empirical work, however, does not yet decisively distinguish among the different theoretical conceptions of “total factor productivity growth.” Economists should devote more effort towards modeling and quantifying total factor productivity.

Economists have long been ambivalent about whether the discipline should focus on the analysis of markets or should be concerned with social interactions more generally. Recently the discipline has sought to broaden its scope while maintaining the rigor of modern economic analysis. Major theoretical developments in game theory, the economics of the family, and endogenous growth theory have taken place. Economists have also performed new empirical research on social interactions, but the empirical literature does not show progress comparable to that achieved in economic theory. This paper examines why and discusses how economists might make sustained contributions to the empirical analysis of social interactions.

This paper -- a product of the Finance and Private Sector Development Division, Policy Research Department -- is pa't of a larger effort in the department to understand the links between the financial system and economic growth. The study was funded by the Bank's Research Support Budget under the research project "Stock Market Development and Financial Intermediary Growth" (RPO 679-53). Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Paulina Sintim-Aboagye, room N9-030, telephone 202-473-8526, fax 202-525- 1155, Internet address psintimaboagye@worldbank.org. December 1996. (44 pages) The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less tban fully pollsbed. The papers carry the names of the authors and should be cited accordingly. Tbe findings, interpretations, and conclusions expressed m tbis paper are entirely those of tbe author. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent

We are grateful to Yongsung Chang and three referees, particularly the final referee, for useful comments. Saasha Celestial-One provided excellent research assistance. Does Schooling Cause Growth? Barro (1991) and others find that growth and schooling are highly correlated across countries. A model is examined in which the ability to build on the human capital of one's elders plays an important role in linking growth to schooling. The model is calibrated to quantify the strength of the effect of schooling on growth by using evidence from the labor literature on Mincerian (1974) returns to education. The upshot is that the impact of schooling on growth explains less than one third of the empirical cross-country relationship. The model is extended to address the choice of schooling, showing that faster growth can induce more schooling by raising its effective return. Calibrating schooling choices suggests that this reverse channel can potentially explain one half or more of the observed relationship between schooling and

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This paper provides a micro-level evidence that financial development impacts growth by reducing financing constraints that would otherwise restrict efficient firm investment. I estimate a structural model based on the Euler equation for investment using firm-level data from 40 countries. I find a strong negative relationship between the extent of financial market development, and the sensitivity of investment to availability of internal funds (a proxy for financing constraints). I also consider size effect, business cycles and legal environment as plausible alternative explanations and find the results to be robust in all cases.

Abstract. In this paper, I examine the spatial correlation of wages and consumer purchasing power across U.S. counties to see whether regional product-market linkages contribute to spatial agglomeration. First, I estimate a simple market-potential function, which is a reduced form for several economic geography models. In this specification, proximity to consumer markets determines nominal wages in a given location. Second, I estimate an augmented market-potential function derived from the Krugman model of economic geography. Parameter estimates for this model reflect the importance of scale economies and transport costs, the stability of spatial agglomeration patterns, and how these features evolve over time. The estimation results suggest that demand linkages between regions are strong and growing over time, but limited in geographic scope. Counties which are greater than 1000 kilometers in distance appear to have zero direct impact on the demand for a given county’s goods. Results for the augmented market-potential function are largely consistent with the Krugman model.

their helpful suggestions. This paper develops the empirical and theoretical case that differences in economic institutions are the fundamental cause of differences in economic development. We first document the empirical importance of institutions by focusing on two “quasi-natural experiments” in history, the division of Korea into two parts with very different economic institutions and the colonization of much of the world by European powers starting in the fifteenth century. We then develop the basic outline of a framework for thinking about why economic institutions differ across countries. Economic institutions determine the incentives of and the constraints on economic actors, and shape economic outcomes. As such, they are social decisions, chosen for their consequences. Because different groups and individuals typically benefit fromdifferent economic institutions, there is generally aconflict over these social choices, ultimately resolved in favor of groups with greater political power. The distribution of political power in society is in turn determined by political institutions and the distribution of resources. Political institutions allocate de

provided helpful comments. Special thanks to Stefanie Schmidt for helpful advice on compulsory schooling data. The views expressed herein are those of the authors and not necessarily those of the National Bureau