Thursday, 20 June 2019

Human Development in the Age of Globalisation

Leandro Prados de La Escosura is a professor
at the University of Charles III in Madrid
In a new EHES working paper, Leandro Prados de la Escosura (Universidad Carlos III and CEPR) analyses wellbeing which is widely seen as a multi-dimensional phenomenon affected not only by material goods, but also health, education, agency and freedom, environment, and security (Fleurbaey, 2009; Stiglitz et al., 2009). Among the multidimensional approaches to well-being human development has been defined as “a process of enlarging people’s choices” (UNDP, 1990; 10; 1993:105). The working paper is available here. This post has appeared in Vox.eu and it is reproduced here.

In a new paper, I approach long-term well-being with an augmented historical human development index (AHHDI) that combines new measures of achievements in health and education, material living standards, and political freedom (Prados de la Escosura, 2019). The AHHDI shows that world human development steadily improved over the last one-and-a-half centuries raising its level 5.3-fold since 1870. Still, the world average level remained below 0.5, on a 0-1 scale, in 2015.

Figure 1 Augmented Human Development* and Real Per Capita GDP Growth (%)          (excluding the income dimension)

Human development (excluding the income dimension) exhibits similar but slightly slower long-run growth than GDP per person (1.4% and 1.6%, respectively), throughout 1870-2015. A closer look reveals, however, that the pace at which human development progressed did not match that of real per capita GDP, with substantial discrepancies over 1913-1970 and since 2000 (Figure 1). During the phase of globalisation backlash (1914-1950), real per capita GDP growth slowed down across the board as commodity and factor markets disintegrated, while human development thrived, particularly in less developed regions. Conversely, in the post-1950 era, human development has advanced significantly less than real GDP per head.

These discrepancies derived from the fact that non-income dimensions have driven world human development gains over time (Figure 2). Life expectancy was the main contributor to human development progress over the 150 years, although its main contribution took place during 1914-1950 and the 1960s when it contributed half the human development gains. Education led the late nineteenth century advance and was a steady contributor to human development over the entire time span considered (but for the 1940s) and political freedom made substantial contributions in the 1900s and 1950s, and during 1980-2000.

Figure 2. Drivers of Augmented Human Development in the World, 1870-2015 (%)

Advances in Human Development were unevenly distributed across world regions. An absolute gap between the OECD and the Rest broadened throughout 1870-2010. In relative terms, however, the gap waned since the beginnings of the twentieth century, especially in its central decades and, again, from 1990 onwards so, by 2015, human development in the Rest represented over half that of the OECD, doubling its share a century earlier. The evolution of the Rest vis-à-vis the OECD in terms of human development is at odds with that in terms of per capita income, that presents a sustained deterioration, from nearly one-third of the OECD level in 1870 to less than 15 per cent in 2000.

Catching up to the OECD in terms of human development has taken place in the Rest since 1900 and, especially, in the 1930s, the Golden Age (1950-70), and during the last two decades of the twentieth century, with education making the single most important contribution over the long run (Figure 3). Longevity emerges as the main dimension behind catching up in the early twentieth century, the 1920s particular, when a large proportion of the Rest was under colonial rule, and especially, in the 1960s, at the time of active public policies across the board and China’s recovery from the Great Leap Forward debacle. Lastly, political freedom was the leading force behind catching up prior to World War I, in the 1930s and 1950s, and over 1980-2000.

Figure 3. Augmented Human Development Catching-up in The Rest 1870–2015 (%)
Why was the contribution of longevity to enhancing human development largely concentrated in 1920-1970? Health improvements can be depicted in terms of a health function (Preston, 1975; Easterlin, 1999). Movements along the function represent gains attributable to economic growth and result in improving nutrition -which strengthen the immune system and reduce morbidity (Fogel, 2004)- and increasing the public provision of health (Cutler and Miller, 2005). Outward shifts in the health function represent improvements in medical knowledge (Riley, 2005; Cutler et al., 2006). The advancement in medical knowledge originated in the discovery of the germ theory of disease (Preston, 1975) that led to the epidemiological or health transition in which persistent gains in lower mortality and higher survival were achieved as infectious disease gave way to chronic disease as the main cause of death (Omran, 1971). The germ theory of disease led to the introduction of new vaccines (since the 1890s) and drugs to cure infectious diseases (sulphonamides since the late 1930s and antibiotics since the 1950s), along chemicals such as DDT, instrumental in battling malaria (Easterlin, 1999; Jayachandran et al., 2010; Lindgren, 2016). However, the germ theory of disease had another far from negligible effect: the diffusion of preventive methods of disease transmission and knowledge dissemination which through schooling and low cost improvements in public health had a profound impact in less developed regions where low incomes precluded the purchase of the new drugs. As a result, mortality declined throughout the life course with special impact on infant mortality and maternal death (Riley, 2001). The epidemiological transition spread beyond the most advanced regions, namely, Western Europe, the European offshoots, and Japan (OECD hereafter), since the 1920s, a finding at odds with the view that dates health improvements outside the West only since the 1940s as the absence of drugs and the lack of concern of colonial rulers prevented it (Acemoglu and Johnson, 2007). By 1970, the epidemiological transition was largely exhausted helping to explain life expectancy’s declining contribution to human development thereafter.

Since 1990 a second health transition with result of better treatment of respiratory and cardiovascular disease and vision problems, has led to mortality falling among the elderly, helped by better health and nutrition in their childhood (Eggleston and Fuchs, 2012; Deaton, 2013). The diffusion of new medical technologies has resulted in longer and healthier life years (Mathers et al., 2001; Hay et al., 2017). This second health transition has been so far restricted to the OECD. The AIDS-HIV pandemic in Sub Saharan Africa and the collapse of socialism, plus the lack of public policies, help to explain life expectancy’s negative contribution to catching up in the Rest since 1990.

References:
Acemoglu, D. and Johnson, S. (2007), ‘Disease and Development: The Effects of Life Expectancy on Economic Growth’, Journal of Political Economy, 115: 925–985.
Cutler, D. and Miller, G. (2005), ‘The Role of Public Health Improvements in Health Advance: The Twentieth Century United States’, Demography, 42 (1): 1¬22.
Cutler, D., Deaton, A. and Lleras-Muney, A. (2006), ‘The Determinants of Mortality’, Journal of Economic Perspectives, 20 (1): 97¬–120
Deaton, A. (2013), The Great Escape. Health, Wealth and the Origins of Inequality (Princeton, NJ: Princeton University Press)
Easterlin, R.A. (1999), ‘How Beneficient is the Market? A Look at the Modern History of Mortality’, European Review of Economic History, 3: 257-294.
Eggleston, K.N. and Fuchs, V. (2012), ‘The New Demographic Transition: Most Gains in Life Expectancy Now Realized Late in Life’, Journal of Economic Perspectives, 26 (1): 137-156.
Fleurbaey, M. (2009), ‘Beyond GDP: The Quest for a Measure of Social Welfare’, Journal of Economic Literature, 47: 1029–1075.
Fogel, R.W. (2004), The Escape from Hunger and Premature Death, 1700–2010. Europe, American and the Third World (New York: Cambridge University Press).
Hay (2017), “Global, Regional, and National Disability-adjusted Life-years (DALYs) for 333 Diseases and Injuries and Healthy Life Expectancy (HALE) for 195 Countries and Territories, 1990–2016: a Systematic Analysis for the Global Burden of Disease Study 2016”, Lancet 390: 1260-1344.
Jayachandran, S., Lleras-Muney, A. and Smith, K.V. (2010), ‘Modern Medicine and the Twentieth Century Decline in Mortality: Evidence on the Impact of Sulfa Drugs’, American Economic Journal: Applied Economics, 2 (1): 118–146.
Lindgren, B. (2016), The Rise in Life Expectancy, Health Trends among the Elderly, and the Demand for Care. A Selected Literature Review, NBER Working Paper 22521
Mathers, C.D., Sadana, R., Salomon, J.A., Murray, C.J.L. and Lopez, A.D. (2001), ‘Healthy Life Expectancy in 191 Countries’, Lancet, 357: 1685–1691
Omran, A.R. (1971), “The Epidemiological Transition: A Theory of Epidemiology of Population Change,” Milbank Memorial Fund Quarterly, 49: 509-538.
Prados de la Escosura (2019), Human Development in the Age of Globalisation, CEPR Discussion Paper 13744.
Preston, S.H., (1975), ‘Mortality and Level of Development’, Population Studies, 29: 231–248
Riley, J.C. (2001), Rising Life Expectancy: A Global History (New York: Cambridge University Press).
Riley, J.C. (2005), Poverty and Life Expectancy: The Jamaica Paradox (New York: Cambridge University Press).
Stiglitz, J.E., Sen, A.K and Fitoussi, J.P (2009), The Measurement of Economic Performance and Social Progress Revisited: Reflections and Overview, http://www.stiglitz-sen-fitoussi.fr/en/documents.htm.
United Nations Development Programme [UNDP] (1990–2016), Human Development Report, New York: Oxford University Press. 

Tuesday, 7 May 2019

Call for Applications ESTER Research Design Course How to strengthen your dissertation project?

The European graduate School for Training in Economic and Social Historical Research (ESTER) is a European platform for postgraduate teaching. ESTER announces its annual Research Design Course (RDC) for economic and social historians on 28 – 30 October in Lyon (France) The ESTER network, established in 1991, involves more than 60 universities throughout Europe and offers high-level research training for PhD students in an international context. At present the network is organised by the N.W. Posthumus Institute, which is a graduate school for economic and social history in the Netherlands and Flanders. The Research Design Course of 2019 will take place at the École Normale Supérieure de Lyon and is sponsored by the LARHRA, Triangle and East Asian Studies Research Centres. This year’s edition will be organised by Claude Chevaleyre (Lyon Institute of East Asian Studies) and Bram Hoonhout (Radboud University). The Research Design Course (RDC) is a format promoted by ESTER since the late 1990s. The RDC assists students in setting up a high quality and well-designed plan for their dissertation under the guidance of a team of leading senior researchers whose task it is to provide comments and feedback.

The RDC is thus not a “course” in sense that an instructor will give a lecture or that you
will discuss historical theories in a seminar setting. Instead, it is centred on presentations
of the individual projects and the ensuing discussions on how to improve them.
You will therefore be asked to write a paper in which you discuss your Research Design.
The aim of this methodological reflection is to investigate the scientific procedures that
historians use to reach scientific explanations and to combine all analytical elements into
a synthetic and coherent historical account. In this paper, you will also prepare a detailed
work plan for the dissertation. The paper has a length of around 25 pages and should
provide the structure in which the remaining research for the dissertation will take place.
Subsequently, you will give a brief presentation during the conference, act as reporter,
chair and peer commentator for other papers, and will receive feedback from junior and
senior scholars in the field.

In this way, the RDC course offers PhD students help in sharpening and refining their
research questions, in strengthening the focus of their research, in increasing the
consistency of their overall dissertation plan, in making explicit the various theoretical
and methodological choices that have to be made in the course of the project, and in
improving the composition of the dissertation. The RDC course thereby aims at a better
awareness of research choices that need to be made.

Description and organisation of the RDC
The RDC consists of a 3-day workshop. Prior to the workshop, PhD students will prepare
a paper (of around 25 pages) according to a set of guidelines. During the workshop, each
paper will be examined in separate 70-minute sessions. Each session will begin with
comments prepared by one of the participating PhD students, followed by comments by
one of the senior commentators, after which a general discussion among all participants
will take place.

All papers must be circulated in advance; students need to read and prepare all papers to
be discussed in their group. This year a maximum number of 40 students can be admitted;
work will take place in three or four groups of students. A certificate will be awarded to
participants who have successfully completed the course.

Applications and admission PhD students should apply online and submit an 800-word abstract of the content of their dissertation project. A first selection will take place on the basis of the abstract. After this stage, PhD students who are accepted will be asked to follow a set of guidelines in order to write their research paper. The final admission to the course depends upon the following points: • the students must meet the deadline for submission of his/her paper; • the quality of the paper: the papers must be of sufficient academic quality, and the level of the English used in the paper must be sufficient. Dates and location The 2019 RDC will take place at the École Normale Supérieure in Lyon. The course will start with an informal welcome session on Sunday 27 October around 6 pm. The course will end on Wednesday 29 October around 4 pm. Students wishing to participate are requested to send in their application no later than 10 June 2019, using the online form. The selection of students will be completed by 21 June. Deadline for submission of papers by accepted students is 15 September 2019. Following that date, the papers will be made available to all participants.



Time path

18 April Call for Applications

10 June Deadline application

21 June Selection completed, applicants informed

15 September Deadline paper submission

6 October Papers online for reading

28-30 October RDC Lyon



Costs
There are no registration costs and accommodation (three nights; from Sunday to
Wednesday) will be covered by the organisers. Because of budgetary constraints, this
accommodation will consist of shared (twin) rooms. Most catering will be covered by the
organisation too, yet on Tuesday you will have to make your own dinner arrangements.
Travel arrangements to, from and within Lyon will also have to be organised and covered
by the selected participants (or their home institution) themselves.

Subsidies
Students who do not have travel budget or for whom financing would be an obstacle to
participation may be eligible for a travel subsidy. This is especially intended to encourage
participation of students from Eastern Europe. Please indicate this wish in your
application.

Contact
For inquiries concerning this course, please contact the education programme director of
ESTER: Bram Hoonhout (b.hoonhout@let.ru.nl)

Saturday, 20 April 2019

How Britain unified Germany: Endogenous trade costs and the formation of a customs union

Nikolaus Wold is Full Profesor in economic
history at Humboldt University in Berlin
State borders can change due to both political and economic disputes. This column shows how the formation of the German state can be traced back to British political intervention at the end of the Napoleonic War. In preventing Russia from gaining territory westwards, Britain set in motion a series of events that gave Prussia strategic trade advantages. This led to the formation of Europe's first customs union (the Zollverein) and prepared the political unification of Germany.
The boundaries of states are the heart of many recent debates, be it the European refugee crisis, the Transatlantic Trade and Investment Partnership (TTIP), or Brexit (Snower and Langhammer 2019). After decades of stability, today we are again seeing heated discussions about the shape and extent of political borders. Clearly, borders are neither naturally given nor random. In Europe and elsewhere, the current state borders have been formed and changed over centuries, sometimes peacefully, often in bloody wars. In Huning and Wolf (2019), we look at the formation of the German nation state led by Prussia and trace it back to a change in borders decided at the Congress of Vienna in 1814/15. 
In a nutshell, we have two findings:
  • First, the geographic position of a state can be a crucial factor for institutional change and development. 
  • Second, the formation of the German Zollverein in 1834 under Prussian leadership was a truly European story, involving Britain, the Russian Empire, and the Belgian revolution of 1830/31. We show in particular that the Zollverein formed as an unintended consequence of Britain’s intervention in 1814/15 to push back Russian influence over Europe. 
In theory, why would the geographic position of a state relative to that of other states matter? Intuitively, it should matter as long as the costs of trade and factor flows depend on their routes. If a large share of my trade has to pass the territory of one or several neighbours, my trade and trade policy will depend on the trade policy of my neighbours. Moreover, if tariffs are levied not only on imports but also on transit trade, as was general practice until the Barcelona Statute of 1921 (Uprety 2006), policymakers face the problem of multiple marginalisation, which is well known from the literature on supply chains. In our work, we provide a simple theoretical framework (in partial equilibrium) to show how the location of a revenue maximising state planner will affect its ability to set tariffs. Some states can increase their tariff revenue at the expense of their hinterland. Next, we show that a customs union can be beneficial for a group of states exactly because it solves the problem of multiple marginalisation. 
A major challenge to testing our idea empirically is that a state’s political boundaries (and hence its location) do not change very often, and if they do, the change is unlikely to be unrelated to trade or factor flows. However, the formation of the German Zollverein in 1834 can be considered as a quasi-experiment. Let us briefly revisit this historical episode. At the end of the Napoleonic wars of 1792-1814/15, only Russia and the UK were left as major military powers. Habsburg, Prussia, and the defeated France attempted to consolidate their positions at the expense of the many smaller states that had just about survived the wars, notably the former allies of Napoleon such as Saxony and Poland. Overall, the negotiations at the Congress of Vienna in 1814 were dominated by military-strategic considerations between the two great powers. Russia wanted to expand westwards, Prussia was desperate to annex the populous Kingdom of Saxony, which bordered Prussia in the south and would create a large and coherent territory. To this end, Prussia was willing to give up not only her Polish territories to Russia, but also her positions and claims on the Rhineland (Müller 1986). This met stiff resistance from Britain, joined by Habsburg and France, which feared a new Russian hegemony on the continent – the ‘Polish Saxon question’. After weeks of diplomatic struggle, the outcome was a division of Saxony, another division of Poland and Prussia being established as the “warden of the German gate against France” (Clapham 1921: 98). Figure 1 shows the result of these negotiations. 
Figure 1 Outcome of the Congress of Vienna, 1814
The Prussian territory was split into an eastern and a western part, divided by the small Hessian states. “Berlin failed to get what it wanted and got what it did not want… The creation of a large Western wedge along the river Rhine was a British, not a Prussian, idea” (Clark 2007: 389). While this was initially considered a diplomatic disaster for Prussia, we also see from Figure 1 that Prussia now controlled large parts of Germany’s most important navigable waterways to the sea, the Elbe and the Rhine. 
Prussia started to take advantage of this position with the tariff law of 1818, which abolished all internal tariffs and established a uniform external tariff, including transit tariffs. From there on traders in the southern states were forced to either detour the large Prussian territory, typically over Hessian land, or accept the transit tollage. Given that in the early 19th century, transport on water was much cheaper than transport over land, this came at a large physical detour cost. According to Sombart (1902), the average freight cost per tonne-kilometre on water was 0.6-1.5% (!) of the freight cost on country roads, or 25% of that on paved state roads. But road construction was slow and expensive and railroad construction would not start before the 1840s. Hence trade was routed along waterways, especially trade in colonial goods, which had to be imported from overseas. 
In turn, revenue from colonial goods – notably sugar, tobacco, and wine – accounted for 80% of the Prussian tariff revenue in 1831 (Onishi 1973), and similar shares could be found elsewhere.  Prussia was interested in tariff revenue, but also in establishing a land bridge between the two parts of her territory. As Prussia started to negotiate a customs union with the Hessian states, this was vigorously opposed by the southern states (Bavaria and Württemberg), who feared becoming hostage to Prussian tariff policy. But it was equally opposed by Habsburg and Hanover (in personal union with the UK). Notably, the Habsburg chancellor Metternich feared that a customs union under Prussian leadership would be a first step towards a political expansion of Prussia. In hindsight we know that he was right. Nevertheless, Prussia succeeded in forming a customs union with Hesse-Darmstadt in 1828.
One major factor that limited the bargaining power of Prussia in the late 1820s was the fact that the Netherlands controlled Rotterdam, the mouth of the Rhine river. Trade on the Rhine was subject to tariffs and duties payable at Rotterdam, as well as staple rights and the requirement to use Dutch shipping companies (Spaulding 2011). It was the Belgian revolution and the prospective competition from an independent Belgium that led to an agreement between Prussia and the Netherlands to reduce these trade costs in March 1831. After this, transit trade over the land of Hesse-Cassel was sharply reduced. In August 1831, Hesse-Cassel joined the Prussian customs union, which provided the desired land bridge between the two Prussian territories. In 1833, Bavaria and Württemberg followed, and in 1834 the German Zollverein was formed. 
In our paper, we show that our theoretical framework can explain this series of events very well. First, controlling for a host of alternative explanations, we provide evidence that states for which the least-cost path to the North Sea or Baltic led via Prussia entered the Zollverein earlier. We also show that this transit captures the effect of distance to the ocean, which has been proposed as an instrumental variable for access to the Zollverein (Keller and Shiue 2014). Moreover, we use historical data on prices, freight rate, and market sizes to calibrate our theoretical model and simulate tariff revenues under the various customs unions. We can show how and why the formation of a customs union between Hesse-Darmstadt and Prussia in 1828 and again the opening of the Rhine trade in 1831 had large effects on tariff revenues of other states (Ploeckl 2015).  Finally, we simulate our model under counterfactual borders – what if Prussia had got what it wanted in 1815, namely, the entire Kingdom of Saxony at the expense of creating an independent Rhine-state? We show that with such borders, the German Zollverein would very likely not have been formed. Put differently, as a collateral damage to her intervention at Vienna in 1815, Britain unified Germany. 

References

Clapham, J H (1921), The economic development of France and Germany, 1815-1914, Cambridge: Cambridge University Press. 
Huning, T R, and N Wolf (2019), “How Britain Unified Germany: Endogenous Trade costs and the Formation of a Customs union”, CEPR Discussion Paper no. 13634.
Keller, W, and C H Shiue (2014), “Endogenous Formation of Free Trade Agreements: Evidence from the Zollverein’s Impact on Market Integration”, Journal of Economic History 74: 1168-1204.
Müller, K (1986), Quellen zur Geschichte des Wiener Kongresses 1814/1815, Bd. 23 of Ausgewählte Quellen zur deutschen Geschichte der Neuzeit, Darmstadt: Wissenschaftliche Buchgesellschaft. 
Onishi, T (1973), Zolltarifpolitik Preußens bis zur Gründung des deutschen Zollvereins. Ein Beitrag zur Finanz- und Außenhandelspolitik Preußens, Göttingen: Schwartz. 
Ploeckl, F (2015), “The Zollverein and the Sequence of a Customs Union”, Australian Economic History Review 55: 277-300. 
Snower, D, and R Langhammer (2019), “Untangling Brexit”, VoxEU.org, 7 January. 
Sombart, W (1902), Der moderne Kapitalismus, Bd 1, Die Genesis des Kapitalismus, Berlin: Duncker und Humblot. 
Spaulding, R (2011), “Revolutionary France and the Transformation of the Rhine”, Central European History 44: 203-226. 
Uprety, K (2006), The transit regime for landlocked states: international law and development perspectives, Washington DC: World Bank Publications.

Tuesday, 2 April 2019

Without coal in the age of steam and dams in the age of electricity: an explanation for the failure of Portugal to industrialize before the Second World War


Sofia Henriques is a postdoctoral fellow at Lund University
In a new EHES working paper, Sofia Henriques, Lund University, and Paul Sharp, University of Southern Denmark, examine the case of Portugal before the Second World War from a hitherto relatively little researched perspective. They thus provide a natural resource explanation for the divergence of the Portuguese economy relative to other European countries, based on a considerable body of contemporary sources. Their argument rests on two observations based on the periods before and after the First World War. The working paper is available here.
Paul Sharp is Full Professor at University of Southern Denmark
For the first period, they demonstrate that a lack of domestic resources meant that Portugal experienced limited and unbalanced growth during the age of steam. Imports of coal were prohibitively expensive for inland areas, which failed to industrialize. Coastal areas developed through steam but were constrained by limited demand from the interior. As can be seen from the figure below, coal thus never constituted a major proportion of Portuguese energy consumption.

Portuguese energy consumption by source 1850-2016 in gigajoules per capita
 Source: 1856-1959: Henriques (2009), with revisions to exclude bunker fuel. 1960-2016: Henriques and Borowiecki (2017), IEA (2015), FAO (2017), DGGE (2017) and PORDATA (2017). Primary electricity expressed by its heat content. See Appendix.

Second, they show that after the First World War, when other coal-poor countries turned to hydro-power, Portugal relied on coal-based thermal-power, creating a vicious circle of high energy prices and labor-intensive industrialization. The figure below gives some idea of how expensive electricity was in Lisbon compared to some other countries.

Electricity prices in 1923 and 1935 for selected countries, dollar cents
Sources: See Table 5, Exchanges rates are from Officer (2009).
They argue that this dependence on thermal/power was the result of (i) water resources which were relatively expensive to exploit; and (ii) path-dependency, whereby the failure to develop earlier meant that there was a lack of capital and demand from industry.
This vicious circle would only be broken during the 1950s and 1960s, a period not covered in their work. Neutrality during the Second World War led to an inflow of capital, which might be the reason why the state was then able to invest in a vast electrification plan using hydro-power, ensuring cheap energy for both old and new industries. However, it was already too late for hydropower to make a significant difference: by then the world had entered the age of cheap oil which democratized industrialization in many countries, meaning that endowments of energy were no longer an important prerequisite and source of growth.

Wednesday, 13 February 2019

Money and modernization in early modern England

Nuno Palma is an Assistant Professor
 at the University of Manchester
New EHES Working Paper by Nuno Palma (Manchester University) is available here.

Classic accounts of the English industrial revolution present a long period of stagnation followed by a fast take-off. However, recent findings of slow but steady per capita economic growth suggest that this is a historically inaccurate portrait of early modern England. This growth pattern was in part driven by specialization and structural change accompanied by an increase in market participation at both the intensive and extensive levels. These, I argue, were supported by the gradual increase in money supply made possible by the importation of precious metals from America. They allowed for a substantial increase in the monetization and liquidity levels of the economy, hence decreasing transaction costs, increasing market thickness, changing the relative incentive for participating in the market, and allowing agglomeration economies to arise. By making trade with Asia possible, precious metals also induced demand for new desirable goods, which in turn encouraged market participation. Finally, the increased monetization and market participation made tax collection easier. This helped the government to build up fiscal capacity and as a consequence to provide for public goods. The structural change and increased market participation that ensued paved the way to modernization. 

Wednesday, 9 January 2019

Economic consequences of state failure; legal capacity, regulatory activity, and market integration in Poland, 1505-1772

Mikołaj Malinowski is a Postdoctoral Research Fellow
at Utrecht University and Lund University
New EHES Working Paper by Mikołaj Malinowski (Lund University - Utrecht University) is available here.


What factors allowed certain regions of Europe to develop their market economies early on and what were the reasons for the relative stagnation of the less successful areas? Specifically, what was the role of the early-modern transition from feudalism to semi-centralised and relatively powerful territorial states in setting the stage for modern economic growth? Political institutions are argued to be crucial determinants of prosperity (e.g. Acemoglu and Robinson 2012). Many scholars identify the parliamentary form of governance and the rule-of-law as preconditions for the market economy (e.g. North and Weingast 1989). The ‘Little Divergence’ in pre-1800 economic development between England/Britain, the Netherlands, and the rest of Europe is often linked to the formation of territorial parliamentary regimes in the two successful countries (e.g. Van Zanden et al. 2012; Broadberry and Wallis 2017). The available GDP evidence suggests that both the British Glorious Revolution of 1688 and the Dutch Act of Abjuration of 1581 were followed by long periods of sustained economic growth. However, not all parliamentary regimes prospered. For example, the available GDP evidence shows that both the transition of Poland into a parliamentary republic in the 16th century as well as the change from absolutism to a parliamentary form of government in Sweden in 1718, were followed by protracted economic decline (Bolt and Van Zanden 2014; Malinowski and Van Zanden 2017, Figure 1). The fact that not all preindustrial parliamentary regimes succeeded economically demonstrates that the consolidation of power around a parliament is an insufficient condition for sustained economic growth.

Figure 1: GDP per capita in 1990$PPP in all Northern-European early-modern parliamentary regimes.

Why did some pre-industrial parliamentary regimes prosper while others did not? According to Besley and Persson (2011), a state can promote prosperity only if it possesses (1) legal capacity denoting the authority and infrastructure to create and enforce the law and (2) fiscal capacity representing the means to finance its operations. Figure 2 presents a convenient summery of the core links between state capacity, parliamentary activity, and Smithian economic growth that are explored in this paper.
Figure 2: Conceptual framework based on the core theoretical relationships in the literature.

With this study, I contribute to the growing literature on the role of centralisation and state capacity in promoting economic growth and market development before 1800 (Bonney 1995; O’Brien 2011; Chilosi et al. 2018; Dincecco and Katz 2016; Dimitruk 2018; Epstein 2001; Johnson and Koyama 2017). I complement the earlier studies that predominantly focused on fiscal capacity with an original study of the impact of legal capacity. Specifically, I analyse the role that the Polish Diet played in developing an integrated domestic commodity market. Early modern Poland is uniquely suited to study the economic impact of the parliamentary regime. In the 16th century, Poland both limited the authority of the king and experienced, in relative terms, a golden age of political centralisation under a strong parliament, the Seym. At the time, the Polish(-Lithuanian) Commonwealth became the biggest state in Europe covering the territories of present-day Poland, Lithuania, Ukraine, Latvia, Estonia, and Belarus. The Seym issued numerous regulations that began to change and unify the dissimilar, historical, regional, economic institutions across this vast country. In the mid-17th century, a constitutional conflict over the mode of royal election led to the introduction of the liberum veto - the right of a single delegate to discontinue the Seym’s proceedings and nullify its decisions. The veto was used to prevent any further constitutional change. Moreover, by bribing the delegates to the parliament, Prussia, Austria, and Russia made frequent use of the veto to abort the Seym’s sessions and weaken the Polish state. This led to a lack of effective law-making at the central level of the state. This ‘historical experiment’ offers a rare opportunity to test if legal capacity and regulatory output of central institutions of governance stimulated pre-1800 market integration. Relying on the research of successful historical England/Britain and the Dutch Republic is insufficient to falsify the hypothesis that strong parliamentary regimes promoted markets.

Figure 3: Number of days a year Polish Seym and British Parliament were in session, 1505-1772.
Van Zanden et al. (2012) proposed to proxy the involvement of an early modern parliament by counting how many days it was in session each year. I present new data on the number of days the Polish Diet was in session each year (Figure 3). I complement this measure of legal capacity with an innovative new index of the Seym’s regulatory output based on an original study of its acts. I show that the right of individual delegates to abort the Seym’s sessions led to a lack of effective law-making. I demonstrate, that the use of vetoes was not driven by the market conditions but linked to the conflict over the mode of royal election. I discuss via which historical mechanisms, when active, the Diet and its regulations promoted market integration and how its inactivity rose the exchange costs. With the use of regression analysis, I identify that both (1) the number of days the Seym was in session and (2) its regulatory output stimulated price convergence. Moreover, I study the individual impact of various types of regulation. I provide evidence that the Seym, when active, lowered the exchange costs (rye price gaps) on the market by harmonising taxes and measures. Conversely, I identify that lack of parliamentary activity induced market disintegration. Figure 4 provides a convenient demonstration of some of the main results.
Figure 4: Standard confidence intervals of the impact of regulating each of the eight individual areas of regulation, analysis based on the three independent Polish price-gap series with Equation 4.