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.

 

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.”

 

The Market Speaks, Mexico Edition

The NY Times has a video on the plight of Mexico City organ grinders.  Apparently, “[they] say they are losing popularity. They face more competition and a younger population that does not appreciate their music.”  

Based on the video below, I cannot imagine why young people aren’t appreciative.  Seriously though, that is some of the worst “music” I’ve heard.  I didn’t have high expectations when I clicked on the video, but it is much, much worse than imagined.

Mexico boasts an amazing pop and rap music scene so it is no wonder young people wouldn’t be too impressed with these guys.  The real question is how it was possible that this sound was ever popular (especially when the guy doesn’t even have a monkey)?  Thankfully the market has spoken–I just hope the government doesn’t step in to subsidize the lost art of organ grinding!

organgrinder

https://static01.nyt.com/video/players/offsite/index.html?videoId=100000004636530

Land reform & violence in Mexico

The economic inefficiency of Mexico’s ejido system  (rural land that is held communally) led the federal government to implement serious land reform in 1992.  [Click here for a video I created for Marginal Revolution University about the creation of the ejido system].

In an interesting forthcoming paper in JEBO called Land Reform and Violence: Evidence from Mexico (here’s an undated working paper version), Tommy Murphy and Martín Rossi study the effects of the 1992 reform on municipal homicides.  In motivating the paper, they write that:

“Bandiera (2003) has convincingly argued that the lack of proper enforcement of land rights by the state played a crucial role in the rise of the mafia in 19th century Sicily. But violence not need be channeled only through organized crime, and it is indeed plausible that different land tenure systems lead to extreme forms of violent crime, such as murders.”

Indeed, the authors find for the case of Mexico “that clearly specified and consistently enforced land rights reduce gains from violence, leading therefore to lower levels of violence, as measured by the number of murders.”

 

 

Misery loves company

As you probably know, Mexican President Enrique Peña Nieto has invited Donald Trump to a meeting today in Mexico City.  It’s hard to fathom Peña Nieto’s motives for this invitation, except maybe to distract attention away from his plagiarism scandal.  The Twitter-verse has been having a field day with the news.  Here are some of my favorites from this morning (I’m sure there will be more):

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Mexican education reform should start at the top

ABC, in a news article yesterday, quoted Trump from January saying about Mexico “We send them practically nothing and Mexico is the new China. I hate to say it. The Mexican leaders are so much smarter than our leaders.” There is so much wrong with that statement that it’s hard to know where to start.  But it’s even more ironic given the recent news out of Mexico about President Peña Nieto plagiarizing almost one-third of his law thesis.

Here’s the Huffington Post on the scandal, “Of the 682 paragraphs that made up the 200-page thesis, titled ‘Mexican Presidentialism and Alvaro Obregon,’ 197, or 28.9 percent, were found to be plagiarized. In a statement, government spokesman Eduardo Sanchez sought to play down the accusation of plagiarism, instead calling the omissions “style errors.” He added that Peña Nieto met all the requirements needed to graduate as a lawyer from Panamerican University.”

I love the government spokesman’s excuse.*  I’ve only seen bits and pieces but as a professor with a lot of experience (unfortunately) of spotting plagiarism, I can assure you that we are not talking about “style errors.”  Nice try though.  I wonder what the higher-up at Panamerican University think about Sanchez’s last statement now that the plagiarism has been revealed!

Compare that to Obama’s educational pedigree (from Wikipedia): “Obama is a graduate of Columbia University and Harvard Law School, where he was president of the Harvard Law Review. He was a community organizer in Chicago before earning his law degree. He worked as a civil rights attorney and taught constitutional law at the University of Chicago Law School between 1992 and 2004.”

Now education does not necessarily equal smarts, but Peña Nieto was not exactly very smart in hiding his plagiarism**, so I’d have to give Obama the big advantage between the two.

*To his credit, he has had a lot to deal with lately (click here for the most recent corruption scandal that EPN is facing)

*See this story in the Atlantic for some examples.  Perhaps my favorite part is the fact that EPN plagiarized a former Mexican president, Miguel de la Madrid.  lol you can’t make this stuff up.