In this paper we exploit the invasion of Europe, particularly Germany, by French Revolutionary armies as a natural experimentto investigate the causal effect of the institutions
of the ancien régime on economic development. A central hypothesis which can account for
comparative development within Europe is that economic growth emerged
first in places which
earliest escaped ancien régime and feudal institutions. However, though there is a correlation
between these two events, this does not demonstrate that it was the collapse of the ancien régime that caused the rise of capitalism. This is because there may be problems of reverse
causation and omitted variable bias. We show how the institutional reforms (essentially the
abolition of the ancien régime) brought by the French in Germany can be exploited to resolve
these problems. These reforms were akin to an exogenous change in institutions unrelated
to the underlying economic potential of the areas reformed. We can therefore compare the
economic performance of the areas reformed to those not reformed before and after the Revolutionary period to examine the impact of the reforms. The evidence we present is consistent
with the hypothesis that the institutions of the ancien régime did indeed impede capitalism.
This paper revisits and critically reevaluates the widely-accepted modernization hypothesis which claims that per capita income causes the creation and the consolidation of democracy. We argue that existing studies
find support for this hypothesis because they fail to control for the presence of omitted variables. There are many underlying historical factors that affect both the level of income per capita and the likelihood of democracy in a country, and failing to control for these factors may introduce a spurious relationship between income and democracy. We show that controlling for these historical factors by including
fixed country effects removes the correlation between income and democracy, as well as the correlation between income and the
likelihood of transitions to and from democratic regimes. We argue that this evidence is consistent with another well-established approach in political science, which emphasizes how events
during critical historical junctures can lead to divergent political-economic development paths,
some leading to prosperity and democracy, others to relative poverty and non-democracy. We
present evidence in favor of this interpretation by documenting that the
fixed effects we estimate
in the post-war sample are strongly associated with historical variables that have previously been
used to explain diverging development paths within the former colonial world.
