The long lasting effects of trade

In The Long Process of Development: Building Markets and States in Pre-industrial England, Spain and their Colonies, my co-author and I show that smugglers in New Spain (current Mexico plus much more) conducted virtually all trade with Europe in the 1600s, including much of the exportation of silver.  In fact, it is estimated that in some decades over 50% of the silver sent to Europe was shipped illegally from Mexico.  Because this trade was illegal, it didn’t bring about a growing system of laws, rules, & regulations enforceable in a judicial system.

As Douglass North wrote, it is important to have property rights that are internalized in people’s consciousness and unconsciousness, embodied in multi-volume codes of laws and regulations, and enforced by impartial courts and professional bureaucracies. That Mexico did not have because of its smugglers ’ economy.

In principle, the de facto legalization of trade between Mexican ports and the United States during the war with France should have been highly beneficial to the development of a commercial culture in Mexico. It was, in fact, advantageous, but the benefits were limited by the fact that Mexico had few ships on the East coast to use in trade with either the US or anyone else.

An excellent new working paper shows that perhaps illegal trading wasn’t so bad after all, even if it didn’t give rise to good institutions.  Daphne Alvarez Villa and Jenny Guarded, in “The Long-Run Influence of Institutions Governing Trade: The Case of Colonial and Pirates’ Ports in Mexico,” show that:

“The presence of trade, either in its legal or illegal form, leads to significantly better development outcomes compared to neighboring areas where such activities were absent.”

They note that conventional wisdom would assume that “smuggling may be detrimental for long-run economic growth and development for numerous reasons: first, by fostering a culture of informality and illegality in detriment of revenue collection; second, the weaker presence of the state may make it difficult to enforce contracts and protect property rights thus depressing economic activity; and finally, colonial smuggling was at times accompanied by piracy and these ports were often subject to armed attacks and pillage, particularly during the 16th and 17th century.”

However, “smuggling during colonial times may have created the necessary conditions to benefit from trade liberalization in the late 18th century (comercio libre) and after independence (1821). For instance, merchants with the “know-how” and experience of clandestine networks had an advantage in the business once trade restrictions were lifted. Such an early start in commercial activities (either legal or illegal) may have compensated for the damaging effects of a weak state presence and supports an emphasis on increasing returns to scale mechanisms.”

The paper is quite good and well worth reading in full.

 

Thinking harder about globalization

I’ve been thinking recently of how little credibility economists have with working class Americans (or so it seems to me).  In some sense, I’m not surprised.  Economists did a terrible job of predicting the Great Recession and didn’t have much new to offer when it came to fixing the mess.  I could hardly blame anyone for questioning how much faith to put in economic theories.

The Harvard Business Review has a great article this week by Joan Williams called “What So Many People Don’t Get About the U.S. Working Class” and she gives a lot of other reasons that white, middle class voters may distrust economists.  She writes “One key message is that trade deals are far more expensive than we’ve treated them, because sustained job development and training programs need to be counted as part of their costs.” 

I think that she is absolutely correct and that perhaps we have focused too much on the long run benefits of trade (wouldn’t be the first time) to the detriment of the short term costs on American workers.  I had a student once who argued that we should just elect economists as presidents and they can then enact the best policies.  Beside the fact that economists don’t come close to agreeing what the “best policies” are, there is also the issue that we live in a democracy and any policy (good or bad) needs popular support behind it.  I stress all the time to my students that they need to understand the economics and the politics in whatever country they are studying.  It is not enough to just know the economics.  You can recommend awesome, growth-producing policies, but if you can’t convince anyone that you are right, then you have nothing.

Somehow this is harder for me to do when it comes to thinking of US policy.  One of the best, and most honest, exchanges I’ve read about the effect of trade policy on the US middle class came in an interview with Angus Deaton.  The interviewer asks Deaton for his thoughts about globalization and the increasing mortality rate, a provocative finding described in The Atlantic in January 2016:

“Between 1998 and 2013, Case and Deaton argue, white Americans across multiple age groups experienced large spikes in suicide and fatalities related to alcohol and drug abuse—spikes that were so large that, for whites aged 45 to 54, they overwhelmed the dependable modern trend of steadily improving life expectancy. ”  

And this is Deaton’s response to the interviewer:

“But you asked me why this [the mortality rate]—what has this got to do with globalization, and I’m like, you know. And I’ve always taken the position which is—you know, I’ve done a lot of work over the years for the World Bank, and I think this is a pretty accepted, in those organizations, cosmopolitan position—globalization has dragged or pulled or liberated hundreds of millions of people from poverty, in India and China in particular. And those people were really poor to start with. So this is just like an incredibly major achievement in the world.

So when you think the world is going to hell in a handbasket, which it sort of is right now, you have to look back on those amazing achievements. And a lot of those have come from opening up markets, you know, from greater international trade, from all the things we know about. And the sort of cosmopolitan position is, OK, maybe some people in the U.S. and Western Europe were hurt by this process, but you know, they’re really well-off compared with the people in China and India who are being helped. So if you take this sort of positon, that we prefer to help people who are poorer than people who are richer, then this seemed like a pretty good thing.

And so, however, when you see these middle-aged people—and these are the people in the U.S. who are bearing the brunt of this—these are the people who used to have good factor jobs with on-the-job training. These are the people who could build good lives for themselves and for their kids. And all of that has gone away. The factory’s in Cambodia, the factory’s in Vietnam, the factory’s in China, wherever. And, you know, there’s been a lot of dispute between the right and left as to how badly off them are. You know, are the price indices correct, are median wages really falling, and so on. But when you actually see them killing themselves, you know, and the mortality rates are going up, then you think something really, really seriously has gone wrong. One of my colleagues—an anthropologist, Carolyn Rouse—has used the term these people have lost the narrative of their lives.

Now, Pamela asked me the question, you know, why? We don’t know why is the answer. And, of course, everybody has their theory, and that’s where—but, I mean, it’s hard to believe it’s not connected up with those 20 or 30 years of declining economic prospects for people with only a high school education in the United States. And, you know, somehow we’ve got to find a way—I’m not against globalization. I’m certainly not going to go for protectionist solutions or something. But we’ve got to find a way of sharing the benefits with those people, too—and if not with them, at least with their kids.”

Perhaps economists shouldn’t have been so surprised about working class support for Donald Trump.

*Note: The blog title derives from a good quote by Deaton on globalization and its short to medium term effects, saying “We’ve really got to think harder about this than we have.”  

 

 

 

Centralization, state-building, and literature

When I first started learning about differential development patterns in the Americas, I believed that former Spanish colonies lagged behind the US because of the overly bureaucratic, centralized government they had inherited from the mother country. This was the original view of Spain that Douglass North put forth in his early work.  Alejandra Irigoin and Regina Grafe describe this interpretation: “Spain was absolutist, interventionist, centralist, statist, bureaucratic and constitutionally disinclined to grant its subject much local government.” [Irigoin & Grafe, HAHR, 2008].

Later I learned that economic historians had rejected this viewpoint as having little basis in reality.  In the book I co-authored, The Long Process of Development: Building Markets and States in Pre-industrial England, Spain and their Colonies, we show that Spain was hardly a centralized, bureaucratic state:

“Until the 1580s Philip’s ‘defense department’ had only one secretary assisted by a handful of clerks, none with military experience. As he prepared to launch the Spanish Armada to try to conquer England, he doubled the number of responsible defense officials to two–one for the army and one for navy! The ships were largely rented from Genoa.”

This lack of centralization was replicated in the colonies:

“The New Spain viceroyalty contained modern Mexico, much of North America, Venezuela, the Caribbean Islands, the Philippines, and all of Central America except modern Panama. Even in the 1600s it nominally included most of the future United States except the Atlantic coastline and the French areas north of the Ohio River. The Viceroyalty of Peru contained all the rest of Spanish South America plus modern Panama.”

Here is a map of New Spain in 1810:

800px-Viceroyalty_of_the_New_Spain_1800_(without_Philippines).png

Here’s how we summarize governance in the colonies:

“Spain established two viceroys in ruling the New World, one essentially for North America and one essentially for South America. Neither viceroy had significant staff, and neither had a centralized bureaucracy.   Until the 1770s Madrid did not even create an orderly set of provincial governments at the level of the future American states.

With the possible exception of the Church, the administrative organs were grossly understaffed. Even in the late 1700s, David Brading notes that ‘the Spanish Crown depended on a mere handful of officials to govern its American empire.’ He reports that ‘in New Spain the entire judicial bureaucracy, for example, the salaried members of the Audiencia of Mexico and Guadalajara, numbered about 30 persons [in the late 1700s].'”

So while over centralization and bureaucratization used to be blamed for slow growth in post-colonial Latin America, we argue instead that it is the opposite:  the countries were insufficiently governed and that left a power vacuum in the chaos of independence.

I was reminded of these issues when I recently finished Willa Cather’s “Death Comes for the Archbishop” (a beautiful book about late 19th century New Mexico).  The novel gives the reader a great sense of how long the distances were in those times and how little that area was actually governed.  Here are some of my favorite quotes:

The Bishop (originally from France) arrives in New Mexico and immediately faces resistance from the locals, who dispute the idea that the territory is no longer controlled by Mexico.

The Bishop laments “I wish I knew how far this is! Does anyone know the extent of this diocese, or of this territory? The Commandant at the Fort seems as much in the dark as I. He says I can get some information from the scout, Kit Carson, who lives at Taos.”  

Because of the resistance, the bishop must travel to the Bishop of Durango to get official papers showing that he is now in charge of Catholic affairs in the area.  That was easier said than done in that period:

“Your Eminence, the Bishop of Durango is an old man; and from his seat to Santa Fé is a distance of fifteen hundred English miles. There are no wagon roads, no canals, no navigable rivers. Trade is carried on by means of pack-mules, over treacherous trails. The desert down there has a peculiar horror; I do not mean thirst, nor Indian massacres, which are frequent. The very floor of the world is cracked open into countless canyons and arroyos, fissures in the earth which are sometimes ten feet deep, sometimes a thousand. Up and down these stony chasms the traveller and his mules clamber as best they can. It is impossible to go far in any direction without crossing them.  If the Bishop of Durango should summon a disobedient priest by letter, who shall bring the Padre to him? Who can prove that he ever received the summons? The post is carried by hunters, fur trappers, gold seekers, whoever happens to be moving on the trails.”

and lastly, the vicar notes that “at Rome they did not seem to realize that it was no easy matter for two missionaries on horseback to keep up with the march of history.”  

I might assign section of the book next time I lecture on centralization and nation-building.  There is something more “real” perhaps about reading it in a novel with characters you care about than just as a passing note in a textbook.

Priorities, Syria edition

As we noted in “When Assad Gives you Lemons,” Syria is bizarrely focusing on promoting tourism in the midst of its civil war.  Instead of focusing on the coastal areas, the Tourism Minister is now hyping Aleppo. Seriously.  And it’s doing so with the help of the Game of Thrones theme music.  You can’t make this stuff up.

CNN describes the unreal ads:

“Showcased in the video are aerial shots of wide green boulevards and swimming pools. It’s a far cry from the rebel-held eastern part of the city, where 250,000 people live with daily airstrikes, according to the UN, and where whole blocks of neighborhoods have been destroyed…Syria’s state-sponsored news agency last week mocked the perception of Aleppo as one of the ‘world’s most dangerous’ cities, tweeting a video of locals enjoying the city’s ‘thriving nightlife.’

Who exactly is the government trying to lure to Syria?  What tourists are so confused (phone call for Gary Johnson) that they don’t know that Aleppo is immersed in a civil war? And why use the theme music for a TV show filled with violence and war?

I guess the filming had to be carefully supervised so they didn’t accidentally get pictures of the other Aleppo:

battle_of_aleppo_617

Priorities, priorities

mexico_tvs

Mexico’s President has been battling corruption rumors for years.  I guess now instead of trying to actively combat corruption, he is instead spreading it around more!

Santiago Perez of the WSJ reports that the Mexican government “recently carried out one of the region’s biggest government giveaways: a $1.3 billion program to hand out close to 10.5 million flat-screen television sets to the country’s poor.” Looks like they have their priorities straight.

There are at least two major problems with this program:

First, and not surprisingly, “the process was riddled with corruption in its latter stages…Some contracts to purchase hundreds of thousands of TVs were awarded in no-bid procedures, and a high-ranking Mexican official asked for kickbacks during the process.” 

Second, “critics of the program say the government shunned less expensive alternatives, designed by the previous administration of President Felipe Calderón, for switching the country to digital television. Gustavo Rivera, executive director of Opciona, a Mexican anticorruption advocacy group [notes] ‘It was an overly expensive and flawed plan that showed either negligence or corruption.'” Or both!

 

 

 

 

The market speaks

Bloomberg just published an article arguing that Trump lost last night’s debate according to at least one important metric:  the Mexican peso market.  The peso/$ exchange rate has been hovering right at 20, an almost 50% depreciation since 2014.  But this what happened to the peso after the debate:

mexican_peso.jpg

The peso increased in value by 1.5%, which is a relatively large jump in such a short period of time.  While many currencies increased in value after the debate, Bloomberg reports that the peso showed “the biggest gain across 24 emerging-market currencies.”

As for the Mexican government’s opinion about a Trump presidency, Mexican Economy Minister Ildefonso Guajardo said last week that “the country’s government is prepared to ‘talk to the devil’ to defend Mexicans in the United States if Donald Trump wins the presidency in November.”

 

Irony fail, Saudi Arabian version

I learned two funny facts this morning about Saudi Arabia.  First, the government is running for the UN Human Rights Council.  Oh the irony. It’s hard to know where to start with that one!

But it gets even better than that folks.  The second fact is that the brochure advocating their candidacy cites women’s rights in SA.  Seriously–you can’t make this stuff up.  And look at the photo that goes along with the supposed women’s rights:

saudiarabia

Besides the photo, there are some really funny statements in the brochure, like “The Government allows women to achieve a number of accomplishments.” [my emphasis on the most insulting parts of the sentence]

Also, there is the ridiculous statement that “Saudi law does not differentiate between men and women. This ensures them freedom of action and the running of their own affairs independently and without any restriction.”  Even if that were true, which it is absolutely not, the statement is incredibly insulting and patronizing.  The government lets women run their own affairs.  Gee thanks.

h/t to Hillel Neuer (@HillelNeuer) for this morning’s irony fail.