The relationship between government size and growth has received an enormous attention in the economics literature, and the recent financial crisis has forced this topic back on the agenda. A highly controversial debate in this respect is whether large governments are harmful for growth....

This paper uses a historical natural experiment – the opening of the Suez Canal – to investigate the relationship between geography and the formation of institutions. While the conventional view is that good geography (commodity endowment) inevitably favours the creation of extractive...