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.
Jeffrey Williamson has weighed in on the debate about the origins of inequality in Latin America. His NBER working paper is titled Latin American Inequality: Colonial Origins, Commodity Booms, or a Missed 20th Century Leveling?
He argues that inequality rates were not high in Spanish America and that it wasn’t until the commodity boom of the late 19th century when inequality really began to increase in the region. Here is the abstract:
Most analysts of the modern Latin American economy have held the pessimistic belief in historical persistence — they believe that Latin America has always had very high levels of inequality, and that it’s the Iberian colonists’ fault. Thus, modern analysts see today a more unequal Latin America compared with Asia and most rich post-industrial nations and assume that this must always have been true. Indeed, some have argued that high inequality appeared very early in the post-conquest Americas, and that this fact supported rent-seeking and anti-growth institutions which help explain the disappointing growth performance we observe there even today. The recent leveling of inequality in the region since the 1990s seems to have done little to erode that pessimism. It is important, therefore, to stress that this alleged persistence is based on an historical literature which has made little or no effort to be comparative, and it matters. Compared with the rest of the world, inequality was not high in the century following 1492, and it was not even high in the post-independence decades just prior Latin America’s belle époque and start with industrialization. It only became high during the commodity boom 1870-1913, by the end of which it had joined the rich country unequal club that included the US and the UK. Latin America only became relatively high between 1913 and the 1970s when it missed the Great Egalitarian Leveling which took place almost everywhere else. That Latin American inequality has its roots in its colonial past is a myth.
I’m curious what Daron Acemoglu will have to say about this. Given his unbelievable productivity, I probably won’t have to wait long!
Zack Beauchamp recently published an incredible gif on Vox. It shows which areas of the world were colonized (and by whom) from 1492 until 2008. You can literally see colonialism take shape and then disappear.
Even though I know that most African countries became independent around 1960, it is still amazing and heartening to see how dramatically Africa is transformed between 1959 and 1974.
William Maloney has a new paper with Felipe Valencia Caicedo called “Engineers, Innovative Capacity and Development in the Americas.” I’ve been a fan of Maloney’s work since I read “Missed Opportunities: Innovation and Resource Based Growth in Latin America” in Economía in 2002. (Wait, didn’t I show something similar in 1997? Maybe the “fan” feeling doesn’t run both directions!)
Here’s the abstract of the new working paper:
Using newly collected national and sub-national data, and historical case studies, this paper argues that differences in innovative capacity, captured by the density of engineers at the dawn of the Second Industrial Revolution, are important to explaining present income differences, and, in particular, the poor performance of Latin America relative to North America. This remains the case after controlling for literacy, other higher order human capital, such as lawyers, as well as demand side elements that might be confounded with engineering. The analysis then finds that agglomeration, certain geographical fundamentals, and extractive institutions such as slavery affect innovative capacity. However, a large effect associated with being a Spanish colony remains suggesting important inherited factors.
One of the first papers that I published came from my dissertation. It was on colonialism and economic growth. It surprises me how many researchers I get writing me desperately requesting my data on the identity of colonial powers and dates of independence in Africa. It’s surprising because it is pretty easy to find online. But I just came across an awesome map of Africa which illustrates this data better (or at least more attractively) than an Excel file. I think I will just send this as a reply next time someone writes: (click the map for a better view)