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.