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Factor Returns, Institutions, and Geography: A View from Trade

IIIS Discussion Paper No. 166

FRB of Atlanta Working Paper No. 2004-17

56 Pages Posted: 22 Aug 2004  

Scott L. Baier

Clemson University - John E. Walker Department of Economics

Gerald P. Dwyer

Clemson University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Robert Tamura

Clemson University - John E. Walker Department of Economics; Federal Reserve Bank of Atlanta

Date Written: June 2006

Abstract

We examine the importance of institutions and geography for determining workers' wages and the return to capital. These returns to labor and capital are examined through the lens of labor and capital's productivities, which are directly related to the factors' returns. We estimate productivities of labor and capital based on trade flows across countries and present statistical evidence that these productivities are related to total factor productivities which rationalize output differences across countries.

We examine whether these labor and capital productivities are related to countries' political institutions and geography. Protection of property rights is the dominant influence on both labor and capital productivity. There is some evidence that a democratic government affects productivity, but once property rights are included in the analysis, the overall democracy index has little influence on factor productivity.. Geography is only important in terms of distance to a large market. Factors such as the incidence of malaria are relatively unimportant.

The unimportance of geography is not only statistical. For example, if the Philippines kept its geography but had the United Kingdom's institutions, the Philippines' labor productivity would increase from seven percent to 75 percent of the U.S.'s and capital productivity would increase from 25 percent to 58 percent of the U.S.'s. On the other hand, if the Philippines were to keep its institutions and were magically more to the United Kingdom's geographic location, labor productivity would increase only from seven percent to 28 percent and capital productivity would increase from 25 percent to 26 percent.

Keywords: Productivity, institutions, property rights, democracy, geography

JEL Classification: 04

Suggested Citation

Baier, Scott L. and Dwyer, Gerald P. and Tamura, Robert, Factor Returns, Institutions, and Geography: A View from Trade (June 2006). IIIS Discussion Paper No. 166; FRB of Atlanta Working Paper No. 2004-17. Available at SSRN: https://ssrn.com/abstract=579101 or http://dx.doi.org/10.2139/ssrn.579101

Scott Leonard Baier

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States
864-656-4534 (Phone)

Gerald P. Dwyer (Contact Author)

Clemson University ( email )

Department of Economics
Clemson University
Clemson, SC 29634
United States

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Robert Tamura

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States
864-656-1242 (Phone)
864-656-4192 (Fax)

Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

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