“good policies” (structural, stabilization) or “good luck” (external). We briefly discuss the individual variables (which are taken from the Brueckner (2013) dataset) and their intuition below. A more detailed technical description, including the original data sources is presented in Annex Table A.1.

Stabilization variables contain inflation, banking crises and the exchange rate. Capturing the idea that macroeconomic fluctuations can influence growth over an extended period, we control for the number of banking crises in each period, the inflation rate, and the exchange rate. A decrease in the latter variable is equivalent to a currency depreciation.<sup>5</sup> Structural variables capture a broad set of fundamental country characteristics. This includes secondary school enrollment as a proxy for human capital, a measure for trade openness (trade-toGDP ratio adjusted for population), an institutional variable (polity2), and private credit-to-GDP as a measure of financial development. Our baseline variable for infrastructure is fixed telephone lines per capita but given the substantial impact obtained for this variable, we also perform alternative specifications with mobile phone and road coverage. Furthermore, our model includes government size (government consumption to GDP). Although several government expenditures can have a beneficial effect on income (especially in areas like health, education, or public infrastructure), the essential idea of this variable is to capture the negative effects that an excessive government and associated taxes can have on private activity. As our model describes long run growth, this should not be confused with the positive stimulative effects that increased government consumption can have during economic downturns. It should also be noted that our model is conditional on other variables, i.e. the positive effect of government spending for education and infrastructure, e.g., will be captured by those variables (and lagged GDP).<sup>6</sup> Finally, a high level of consumption (i.e. recurrent) expenditures limits fiscal space to counter cyclical shocks. Generally welcome counter-cyclical measures can then only be financed with relatively distortionary taxes (see also Afonso and Furceri, 2010, on the effect of expenditure volatility) or an increased debt burden.<sup>7</sup> External factors are reflected in terms of trade and commodity prices. Net barter terms of trade and the country-specific commodity export price index of Arezki and Brueckner (2012) are used to capture the most important effects of the global environment on growth. Furthermore, global conditions will also be reflected in the time dummies.

Although our variables are not perfect, they allow for a large coverage of developing countries. In the best case, one would have more sophisticated variables to reflect the underlying economic

> 5 As the interpretation of the exchange rate variable is somewhat difficult in the cross-country context from a policy perspective, it should rather be seen as a control variable, i.e. controlling for the fact that an undervalued exchange rate might boost growth temporarily.

> 6 See also Loayza et al. (2005: 40-41). Optimally, one would like to subtract such expenditures like health, education, or infrastructure but this is not feasible for the wide range of countries included in the sample. Following the line of reasoning above, one should also note that the negative effect of government size is considerably smaller when the model is estimated unconditionally (i.e. without controlling for other variables), reflecting the fact that it then implicitly captures the positive effects of education, infrastructure etc. (see the results in Araujo et al., 2014, especially Tables 3 and A.3).

> 7 For an alternative view on the effects of government consumption on output in neoclassical growth models, see e.g. Aiyagari _et al._ (1992) and the literature therein.

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