Any lessons for today? Exchange-rate stabilisation in Greece and South-Eastern Europe between economic and political objectives and fiscal reality, 1841-1939

The Greek financial crisis has laid bare serious economic fragilities in the South-Eastern corner of the 19 member strong euro area: a government debt stock of 170% of GDP, a dangerous bank-sovereign embrace, and an economy in its seventh year of recession which has declined more than a quarter since its 2008 peak. 

Matthias Morys is lecturer at the
University of York

In tandem with the process of weakening economic data, politics has become more difficult to navigate: torn between creditor demands for structural improvements of the economy and domestic reform fatigue, the Greek government attempts to please simultaneously the international and the domestic audience yet frustrates both in the process. As a result, the scenario of Grexit over the medium term continues to loom large, though few observers expect it to be imminent given the 12th July 2015 accords between Greece and its creditors.

A better understanding of Greece’s current travails requires adding both a regional and historical dimension. Not only has Greece itself suffered more than its fair share of financial crises since political independence in 1832, but these apparently recurring events have been embedded in a regional context prone to financial instability. To begin with the present: Greece’s economic problems – a twin deficit (budget and current account) financed by capital inflows before the 2008 global financial crisis which was brought under control thereafter only by outside financial help – are widely shared regionally, though on a lesser scale. Romania, the second largest South-East European (SEE in the following) economy after Greece, for instance, received 20 billion euro between 2009 and 2011 as part of the European Union balance-of-payments assistance programme (in conjunction with the International Monetary Fund) and has since then followed two similar programmes (2011-13, 2013-15), yet without drawing actual funds.

Furthermore, SEE’s current travails stand in a long tradition of persistently weak government budgets, government debt-build up and default, entry into and exit from the dominant fixed exchange-rate system of the day and, last but not least, a delicate relationship between national government and foreign creditors. The Greek experience has tended to be more extreme, yet structurally similar to Bulgaria, Romania and Serbia/Yugoslavia, the other three Balkan countries with a monetary history stretching back to the 19th century. Uncovering and analysing this rich tradition and reflecting on potential lessons of the past for Greece and SEE today are the purpose of a new EHES working paper by Matthias Morys from the University of York.

The paper is fundamentally concerned with two seemingly simple questions. First, why was adherence to both the Classical Gold standard and the interwar gold standard so short in SEE compared to the rest of Europe despite the clear political intention to join? Second, what was the experience with fixed exchange-rates? All four countries conducted fiscal policies inconsistent with monetary policy required to join and successfully adhere a fixed exchange-rate system. While there was strong political will to join the gold standard in all four countries, political actors failed to realise (or were unable to implement) balanced budgets as a pre-condition for successful adherence. Persistent budget deficits were either closed through seigniorage or capital imports.

Yet while seigniorage and (excessive) capital imports were problematic on their own, it was their combination (with strong doses of each) in the period ca. 1875 – 1895 that gave rise to a feature characteristic of the SEE experience with fixed exchange-rates ever since: financial supervision. Greece and Serbia accepted such an arrangement after their defaults (in 1893 and 1895, respectively) as part of a debt restructuring; Bulgaria “voluntarily” acceded to it in 1902 as precondition for another international loan. Creditor countries insisted on an end to inflationary finance and set the countries on a path of monetary stability that eventually saw them join the gold standard (Bulgaria: 1906; Serbia: 1909; Greece: 1910). Foreign lenders did not do this for altruistic reasons; they rather saw – not unlike today in the euro area – stable exchange-rates as a means to avoid currency mismatch and hence ensure debt repayment. Yet by improving fiscal capacity, financial supervision achieved what purely domestic initiatives for currency stabilisation since the mid-1860s had eluded: not falling for the perennial temptation of debt monetisation. The resurrection of the gold standard in SEE in the 1920s followed a similar pattern. De jure stabilisation in the late 1920s required all four countries to take out international loans in order to replenish currency reserves. In return, they had to accept a considerable amount of foreign financial supervision as well as serious restrictions on debt monetisation.

In seven of eight analysed cases, then, joining the gold standard was either preceded by several years of financial supervision (Bulgaria, Greece and Serbia before World War I) or coincided with international loans-cum-conditionality (the interwar experience); only Romania followed gold on its own between 1890 and 1912. This interconnectedness – which was not shared by any other region of Europe – raises interesting questions: was the infringement on national sovereignty which financial supervision entailed a price worth paying for sound money?

Lessons for today

The fact that the current financial monitoring is not a first in the country’s history is not lost on the average Greek. It makes dealing with the current crisis all the more difficult, as it feeds on a widespread perception that the real economic and political power lies with “outside forces”. While Greece’s international creditors would be well advised to pay more attention to this psychological undercurrent, it is worth highlighting also the positive effects of financial supervision. In a region in which governments routinely fell for the perennial temptation of debt monetisation, foreign pressure achieved what domestic institutions had eluded: break the dominant pattern of fiscal dominance and allow monetary policy to be rule-based. In so doing, financial supervision in cooperation with national governments not only lived up to the specific details of a debt restructuring agreement or a League of Nations loan; it allowed the gold standard legislation – which commanded broad political support yet had been dormant often for decades in the face of fiscal dominance – to be eventually implemented.

Herein lies arguably the lesson for the present. Euro membership commands broad support among the Greek public (ca. 80%). Fully aware of its own poor track record in monetary policy, Greece deliberately “tied its own hands” by entering the euro in 2001. Many Greeks fear that “untying their own hands” – i.e., a return to the drachma – would revive the inflationary finance of the past. In an attempt to save euro membership, Greeks are grudgingly accepting the financial monitoring by the IMF and the EU, following the time-honoured path of their forefathers under the gold standard. Greek people suffer from the infringement on national sovereignty which the financial supervision comes with. This sentiment is psychologically most understandable, and we witness exactly the same in the 1890s and again in the 1920s. Yet here comes the second key lesson from economic history for today. The perceived antagonism between Greece and its creditors in the 1890s and the 1920s – including the strong reaction against the lenders which were mainly the British at the time – was short-term and quickly forgotten. What weighed much more importantly to Greeks was that the political and economic objective of exchange-rate stabilisation was achieved.

This ambivalent reaction was at full display again in July 2015, when Greek voters first triumphantly rejected the bail-out demands by the creditors in a referendum, only to be signed by the Greek prime minister a week later. The first one was an expression of deep frustration, an understandable reaction by the Greek people after five difficult years; the second one was based on cool-headed analysis by the Greek government on how to maintain the long-run political and economic goal of exchange-rate stabilisation.

The lesson then for today might be this: Give precedence to what Greece desires most: continued membership in the European Monetary Union. Stay the course with a programme that may ask for a great deal but is – certainly in the eyes of the Greek electorate – far superior to leaving the euro. And, last but not least, disregard the noise and the occasional bad temper on all sides, for what matters most is the final outcome.

This blog post was written by Matthias Morys, lecturer at the University of York.
The EHES working paper is downloadable here: http://www.ehes.org/EHES_84.pdf

The 11th Historical Economics Society Conference

The 11th Historical Economics Society Conference took place 4-5 September in Pisa, hosted by Giovanni Federico. More than 120 papers covering all areas of economic history were presented and discussed during two intensive days. 

The conference was hosted by University of Pisa

Key note speaker
Robert C. Allen

The conference was inaugurated with a keynote speak by Robert C. Allen who talked insightfully about absolute poverty measures. Criticizing the common poverty measure One dollar a Day, Allen advocated a linear programming approach in which the poor speaks for themselves by revealed consumption baskets.

The keynote was followed by an intensive full day program with six parallel sessions covering topics from a wide range of geographical areas and time periods. The first day was concluded in the early evening of the 4^th, leaving the economic historians with some free time to continue the discussions, and for some, giving a chance to see the famous leaning tower.

The second day continued with paper presentations followed by discussions. Before lunch, a special session was designated to the finalists of the Gino Luzzatto Prize for best dissertation relating to any topic in the economic history of Europe defenced during the period July 2013 to June 2015. There were three finalists in the Gino Luzatto Prize competition and each presented their main results to the audience.

Chairman of the prize committee, Stephen Broadberry and the three
finalists, Ulas Karakoc, Eric Sneider and Yannay Spitzer

First, Ulas Karakoc who received his PhD from the LSE and is currently at Humboldt-Berlin discussed the divergence between Turkey and Egypt in the interwar period. Secondly, Eric Schneider (with a PhD from Nuffield, Oxford and currently at LSE) presented new findings relating to energy costs, health and gender among British families and American school children. The third finalist, Yannay Spitzer (who received his PhD from Northwestern University and is currently at Hebrew University) presented his work about Pogroms, Networks, and Migration, specifically concerning the Jewish Migration from the Russian Empire to the United States in the late 19^th and early 20^th century. After the presentations the audience took the opportunity to ask several questions about the new findings presented in these recent dissertations. The name of the winner of the prize was however kept secret until the Conference dinner, when it was announced that Yannay Spitzer received the honour. 

Intensive mingeling and discussions during coffee breaks

The conference program concluded with the General Assembly for the members of the EHES, chaired by President Giovanni Federico. Treasurer Olivier Accominotti presented that the finances of the EHES are in good health, and the current editorial team of the European Review  of Economic History (Niko Wolf, Joan Rosés and Dan Bogart) explained that the journal has had an impressive amount of submissions lately and that it is consistently climbing in impact rankings, now only surpassed by Journal of Economic History in the field.  The two former editors, Sevket Pamuk and Greg Clark, were heart fully thanked for their services. As the General Assembly closed the conference, the presidency of the society was handed over from Giovanni Federico to Joerg Baten who took the chance to welcome everyone to the next EHES meeting to be held in Tübingen 2017.

President elect Joerg Baten (left) with Presiden Giovanni Federico (right)

The conference dinner took place at the beautiful Closter of Chiesa Di Santa Maria Del Carmine with excellent food and a dessert in the shape of the leaning tower. 

Delicious tower

Glasgow FRESH meeting: “Migration, Entrepreneurship and Social Change”.

On the 2nd of June 2015 Marc Di Tommasi and Zoi Pittaki organized a FRESH meeting in Glasgow on the theme “Migration, Entrepreneurship and Social Change”. The University of Glasgow hosted the event and let us use as a venue the historical Lilybank House, a lovely building constructed in the 1830s and extended by Alexander "Greek" Thomson in the 1860s.
The rationale behind the event has been realising the deep connections and intersections between migration and entrepreneurship, and wanting to explore this space with a particular attention to social change. This influenced the very structure of the conference with three different sessions each dedicated to the three theoretical linchpins.

The first session, chaired by Iida Saarinen from the University of Edinburgh, was dedicated to migration with two interesting papers that nicely set the tone for the rest of the day.  First of all Claudia Rei, from Vanderbilt University of Nashville, Tennessee, posited extremely  interesting methodological questions in her search for the “Historical counterfactual” to the Jewish diaspora caused by Nazi expansion. Then Jimyong Lim, from King’s College, London, managed to overcome the disappearance of his laptop and delivered a talk on the racist anti-Japanese movement that prospered in the United States at the turn of the twentieth century.
After the delegates took a well-deserved coffee break they reconvened for the migration keynote speech, where Professor Richard Smith, from the University of Cambridge, summed up the long history of the “urban graveyard” debate and presented the latest historical demography data from the London parish of St. Martin in the field. The subsequent debate, long and lively, further explored the concepts introduced.

After a lunch break where we all had a change to enjoy the quite tasty Glasgow hospitality we all reconvened for the entrepreneurship keynote speech. Professor Dan Wadhwani, from the University of the Pacific, expounded on the theoretical framework behind the concept of entrepreneurship and the role played by the migrants in a very well received talk.

This was followed immediately by the session on Entrepreneurship, chaired by Jimyong Lim, from King’s College, London. First of all Valentina Sgro, from the Italian Università degli Studi del Sannio, with her co-author Vittoria Ferrandino stuck home, explored the rich and eventful business history of the Italian food industry in the USA. The audience was enthralled in discovering the hidden Italian origins of many famous American brands, like Mr. Peanut. Then Peter Bent, from the University of Oxford, took us in an entirely different direction with a quantitative analysis, helped by his advanced econometrics skills, of financial crises in the gold standard era. His hypothesis on the role of capital flows spurned serious interest from the economists in the audience.
After the last coffee break, surely these historians need a lot of coffee to get going, the third and final session started. This session, chaired by Peter Bent, from the University of Oxford, was dedicated to Social Change and, in the intention of the organisers, helped to pull together the various strands of the conference by concentrating on the effects on the social sphere. First of all Mathias Blum, from Queen’s University, Belfast, presented Irish anthropometric data from the period of the “potato famine”. The surprising results, that the Irish which not migrated displayed greater heights and so greater living standards, prompted a lively discussion with many different explanation proposed by the audience. The last paper of the conference was presented by Iida Saarinen from the University of Edinburgh, and it dealt with the life histories of the Scottish Roman Catholic seminarians and how to complete their studies they had to spend an exceptionally long period abroad. This had an obvious influence on their outlook and therefore on their pastoral activity when they came back to Scotland.
With the end of the conference proper a lovely dinner followed where the delegates sampled more of the Scottish cuisine and explored in an informal setting some of the themes of the long day.
This event wouldn’t have been possible without the fundamental financial support of the Economic History Society, the Centre for Business History in Scotland and the European Historical Economics Society.

This blog post was written by Marc Di Tommasi,  University of Edinburgh, and Zoi Pittaki, University of Glasgow

Size and structure of disaster relief when state capacity is limited: China's 1823 flood

For the Chinese people, the 19th century was not only a century of economic stagnation, massive uprisings, and humiliation in the face of foreign aggressors, but also of devastating natural catastrophes probably causing millions to die of starvation and epidemics. One of these disasters was the flood in 1823, at the beginning of Emperor Daoguang’s reign. The Qing History Record offers a flavour of how contemporary historians saw the relevance of this flood: “As the Qing Dynasty was established, the country entered into a time of peace and prosperity never seen before in history […] However, this ended in 1823 because of the big flood.”

However, despite the gravity of this catastrophe, there is a lack of detailed research based on archival data. This is mainly because the historical records have been scattered until recently. Following a reorganization of China’s First Historical Archives and the instalment of a dedicated disaster section, though, researching particular catastrophes has become feasible for the first time. Therefore, in a recent EHES working paper Ni Yuping of Tsinghua University and Martin Uebele from the University of Groningen are able to present new archival evidence about this major disaster.

Our first piece of evidence is on the scale of the flood (see Figure 1). Since our sources tell province by province which county was inundated, we can tell that the flood affected 20 percent of China’s counties, and thus probably 80 million people. (Given that the more populous eastern provinces were affected more strongly, this is a conservative estimate.)

Figure 1. Share of counties flooded in 1823.

Apart from the sheer size the 1823 flood mattered in two more ways: First, there is a debate about the moral nature of the Qing Empire under the pretext that a Confucian ruler would have to care for his people especially in times of dearth. However, as principal-agent problems grow with the size of a pre-modern state, corruption might easily undermine even the most humane intentions of a state and could potentially turn it into the exact opposite. Evidence for this is plentiful (Will 1990, Shiue 2004), and has made its way into the survey literature (Ó Gráda 2007, p. 16). But given the limited state of archival evidence, can we confirm or refute statements made in literature with our new data?

Chiefly, our sources tell how much was spent for each province on various items of relief, from direct payments in silver to food shipments, and water infrastructure repairs, plus the various items of tax relief. Adding everything up and dividing the amount in silver by 80 million we find that spending per capita was sizable, even when compared to per capita payments in Europe: for example during the Irish famine (1845-49). But did it actually reach the provinces in need or was the money regularly embezzled?

Quantitative research on this has been provided by Carol Shiue (2004). Her data covers the 18th century and mainly contains the information if a province received disaster relief or not. Combining this with an extreme weather indicator from another source she finds no evidence that relief depended on weather events. Alternatively, she provides a theory that relief would rather be distributed due to military or political goals leading to moral hazard at the lower levels of administration.

Figure 2: Relation of tax relief and weather index, Chinese provinces, 1823.

The difference between her and our data is that we actually do know how much relief was spent in each province, and we can show that provinces with more flooded counties received more relief (Figure 2). So if the same distribution rules applied in this specific year 1823 were also used in the 18th century, her argument about no relationship between disaster and relief would not hold. 

The second important topic is that early in the 19th century in several countries around the world the foundations for modern economic growth were established (see an earlier blog post on paved road building in Westphalia, 1820s-1850s by one of the authors; Gallardo and Uebele 2015). To some extent this rested on public investments and went hand in hand with reforms of the bureaucracy, but to what extent was this possible in China at this time? Probably the Qing central state’s provision of short-term disaster relief might have been an obstacle to growth because the government’s funds were exhausted and did not suffice for substantial long-term investments. This could explain the “Daoguang Depression,” the secular lack of economic growth experienced in the first half of the 19th century.

We find that the total spending in 1823 amounted to about half of the state’s annual tax income. This is because spending was large, but also because the Chinese state was small. Its tax revenue was maybe 1-2 percent of GDP compared for example to Britain where it amounted to at least 10 percent of GDP. Bearing in mind the internal and external security challenges such as the Taiping Rebellion and the Opium Wars, we conclude that the capacity for further investments in infrastructure or bureaucratic reform was surely limited and may have contributed to China’s lack of economic growth. 

References:

Uebele, Martin and Daniel Gallardo-Albarrán (2015): “Paving the way to modernity: Prussian roads and grain market integration in Westphalia, 1821-1855,” Scandinavian Economic History Review 63 (1): 69-92.

Ó Gráda, Cormac (2007): “Making famine history,” Journal of Economic Literature, 45 (1): 5-38.

This blog post was written by Martine Uebele, Lecturer in Economic and Social History at University of Groningen

The working paper can be downloaded here: http://www.ehes.org/EHES_83.pdf

Agriculture in European Little Divergence: The Case of Spain

For most of the sixteenth century, Spanish political might rose together with a sustained and intense economic development, allowing the country to remain among the most affluent nations of Europe. However, with the turn of the century economic growth halted, and was followed by a rapid decline. The crisis of the seventeenth century was particularly hard with the Iberian economy that only recovered significant growth levels during the first years of the eighteenth century. As a consequence, Spain lost ground with the leading economies of Europe and became a secondary power not just in political terms but also in economic ones. What were the roots of the little divergence between Spain and the north of Europe? What was the role played by the agricultural sector?  In a new EHES working paper, Carlos Álvarez-Nogal, Leandro Prados de la Escosura and Carlos Santiago-Caballero analyse the evolution of Spanish agriculture between 1400 and 1800, using an extensive database of tithes to reproduce the changes experienced by the primary sector. The results suggest that agriculture played a significant role explaining the little divergence, experienced between Spain and the leading economies in Western Europe during the late modern age.

Stored in ecclesiastical archives for centuries, tithe records are among the few direct accounts of agrarian production for preindustrial times, and have been widely used by economic historians to estimate the evolution of the primary sector in the very long run. The historical presence and power of the Catholic Church in Spain, had positive externalities for economic historians that have at their disposal tithe records that are generous both in geographical and chronological terms. The tithe was one of the most important taxes in preindustrial Spain for the Church – and other authorities - that received it and for the producers who suffered it. It usually represented a ten per cent of total output that had usually to be paid when the product had been harvested.  Virtually all agrarian production was taxed, from livestock to grain, wine, olive oil or honey. Even the new crops like maize that arrived from the New World were quickly introduced by the church in the list of taxable products. This paper collected an extensive dataset of tithes at local and regional levels between the fifteenth and the eighteenth centuries that were unified to estimate the evolution of agrarian production in Spain in the very long run.

The results show that output per head reached its maximum levels in the mid fifteenth century and remained high until the late sixteenth century, suffering a severe contraction between 1570 and 1590, a period followed by a milder deterioration up to 1650. Although a small recovery took place between the late seventeenth century and the mid eighteenth century, the following decades were characterized by a new fall, reaching output per capita its minimum around 1800. Therefore, Spanish agriculture moved from a relatively high path to a lower one that persisted at least until the beginning of the Peninsular War. The results using a direct estimation like tithe records coincide with those obtained by Alvarez-Nogal and Prados de la Escosura (2013) using an indirect estimation though a demand function.

Agricultural output per head (Tithes and Demand approach) and population, 1400-1800 (decadal averages in logs) (1790/99=100).

The authors believe that the intense collapse that took place in the late sixteenth century was consequence of urban and international demand contraction, that resulted from the collapse of domestic markets, monetary instability, and war in Iberia. As consequence incentives to produce for the market decreased as did the intensive use of labour and land. As a result, the land rent-wage ratio contracted all the way to the 1670s, even when real wage rates continued to decline until the 1640s, and only recovered in a sustained way since the 1720s. The periods of agrarian contraction also coincide with the two largest climatic oscillations experienced in Spain, the Initial Oscillation between 1570 and 1640 and the Maldá Anomaly between 1760 and 1800. 

Agrarian production per head and population moved together up to 1750, suggesting the existence of a land abundant frontier economy until the mid eighteenth century. It was only during the second half of the eighteenth century when the results seem to indicate the existence of a Malthusian pattern. 

During most of the modern age, Spain lost economic ground with the rest of North-Western Europe. Far from being able to compensate part of the gap, Spanish agriculture contributed to the little divergence between north-western and southern Europe. Long-run trends in agricultural output per head between Spain and Britain show that agriculture fuelled the increasing gap between both powers. In Spain output per head fell dramatically after 1570 and did it again during the second half of the eighteenth century. By 1800 output per head was considerably lower than in the late fifteenth century. On the other hand, output per head in Britain exhibits a mild U shape with the levels of 1450 already recovered in the 1770s and overcome by 1800. While in Spain agriculture employed about two-thirds of the male labour force by the late eighteenth century – and four fifths by 1500 – in Britain the numbers went down to just over one-third in 1801 from two-thirds in 1522 (Broadberry et al., 2014). Labour productivity in Spain suffered a long-run recline throughout the early modern age, while it showed a significant increase in the case of Britain. Therefore, the study concludes that far from being helpful, agriculture was a significant player in the little divergence experienced between north-western and southern Europe. 

This blog post was written by: 

Carlos Álvarez-Nogal,  Associate Professor in Economic History, 

Leandro Prados de la Escosura, Full Professor in Economic History 

Carlos Santiago-Caballero, Associate Professor in Economic History at Universidad Carlos III de Madrid. 

The working paper can be downloaded here:

http://www.ehes.org/EHES_80.pdf

Human Development as Positive Freedom: Latin America in Historical Perspective

This blog post was written by
Leandro Prados de la Escosura,
professor in Economic history at
Unidersidad Carlos
III de Madrid 

How much has well-being improved in Latin America over time? How does Latin America compare to the advanced nations? Have their differences widened? Why? 

Trends in well-being have been drawn on the basis of GDP per head. However, as development is increasingly perceived as a multidimensional process, a more comprehensive approach to living standards has been put forward. Leandro Prados de la Escosura provides new answers to these questions with the help of a new historical index of human development (HIHD) that covers from 1870, when large-scale improvements in health, helped by the diffusion of the germ theory of disease, and in primary education were initiated, to 2007, the eve of the Great Recession.
The HIHD shows substantial gains in Latin American human development since 1870 –and especially over 1900-1980-, with HIHD in 2007 nine-fold the level in 1870.

Trends in the HIHD do not match those observed for real GDP per head (Figure 1). Human development (excluding its income dimension) grew faster than real GDP per head over 1870-2007, but it is during the globalization backlash of the 1930s and 1940s when clearer discrepancies emerged. Thus, while real GDP per head slowed down as world commodity and factor markets disintegrated, better health and education practices became widespread resulting in a major advance in human development. Since 1970, the pace of advancement in human development has not matched that of economic growth, with a dramatic contrast in the 1980s when the collapse in per capita incomes paralleled moderate gains in well-being.

Figure 1 Real GDP per Head and Human Development (excluding income) Growth (%)

Social dimensions have driven human development gains in Latin America over the long run (Figure 2). Longevity accounts for the larger share during the first half of the twentieth century. Access to knowledge had, instead, a leading role in the late nineteenth century and during the second half of the twentieth century.

Figure 2 Drivers of HIHD Growth in Latin America, 1870-2007 (%)

The epidemiological or first health transition –that is, the phase in which persistent gains in lower mortality and higher survival were achieved as infectious disease gave way to chronic disease- was experienced in Latin America during the first half of the 20th century and, especially, over 1938-1950. 

Major gains in longevity up to mid-twentieth century were associated to advances in medical science and technology, such as the diffusion of the germ theory of disease (1880s), new vaccines (1890s), and sulpha drugs to cure infectious diseases (late 1930s) and antibiotics (1950s). Economic growth also contributed to expanding longevity through nutrition improvements -that strengthened the immune system and reduced morbidity- and public provision of health. In Latin America, however, such an advance often did not result of widespread treatment of infectious diseases with sulpha drugs and antibiotics, largely inaccessible to its low-income population, but was achieved through low-cost public health measures and the diffusion of hygienic practices, often during periods of economic stagnation.

Since mid-20th century, longevity gains slowed down in Latin America as the early-life, first health transition was exhausted. In comparison with advanced economies (OECD countries, for short) an incomplete catching up took place in Latin America between 1900 and 1980, as part of a wider process that embraced all developing regions (Figure 3). Life expectancy only made a substantial contribution to catching up during 1938-1950. Education has been the leading dimension in catching-up, especially, during the second half of the twentieth century (but for the 1980s).

Figure 3 Latin America’s HIHD Catching-up with OECD, 1870-2007 (%)

At the turn of twentieth century a second health transition has started in the advanced countries, with mortality falling among the elderly -as respiratory and cardiovascular diseases were fought more efficiently and their health and nutrition in childhood had been better. Latin America’s absence from this second health transition helps to explain why the region has fallen behind in terms of human development.

Latin America’s position relative to the OECD differs significantly in terms of human development (excluding its income dimension) and GDP per head. While sustained catching-up took place over the 20th century, in which Latin America achieved almost two-thirds of OECD level, in terms of GDP per head, after a long phase of stability, Latin America’s declined since 1950, representing only one-fourth of OECD level at the beginning of the 21st century. A comprehensive depiction of human development needs to incorporate the opportunities individuals have in the choice of life, which includes exercising their political capabilities and influencing public decisions. 

The case of Cuba provides an extreme contrast between the success in achieving ‘basic needs’ in health and education and the failure to enlarging people’s choices –the core of human development- as agency and freedom are curtailed by the political regime. The same caveat applies to fascism and other totalitarian regimes under capitalism that suppressed freedom and agency across Latin America. Nonetheless, it is reassuring that, since 1950, human development and democratization are correlated in Latin America and their association grows stronger as their levels get higher.

A development puzzle emerges from the previous discussion and raises key questions. 

Why are trends in GDP per capita and human development uncorrelated over long periods of time when increases in per capita income would surely contribute to better nutrition, health and education? Does the explanation lie more with public policy (e.g. public schooling, public health, the rise of the welfare state), or with the fact that medical technology is a public good? 

Why did life expectancy stop being the driving force of world human development as the first health transition was concluded? Why Latin America has been so far left behind in the second health transition? Is it due to a lack of public policies, or to an inequalising effect of new medical technologies? To what extent did restricted access to health and education, as a result of income inequality, play a role? These questions deserve further investigation, as the answers are likely to have far-reaching policy ramifications.

By: Leandro Prados de la Escosura (Universidad Carlos III and CEPR)

Read more here: 

http://www.ehes.org/EHES_77.pdf

Financing steady disbursements with a credit line and an option for long-term funded debt: an asiento of Philip II

Philip II of Spain

Philip II ruled the first global empire with the limited state resources of the early modern age. As for any state before Waterloo, expenditures were mostly military. The celebrated silver and gold from the Americas were no more than 20 percent of his revenues, and a bit less in the first half of his reign. The fleet, a convoy, brought the precious metals once a year in the early Fall but the quantity was highly variable and unpredictable. The most stable part of the revenues (about a third) was raised through sales taxes that were controlled by the main cities of Castile. The rest was collected by scattered sources, tax farming, ad hoc contributions of the Church, etc... And in this state building period, there was no administration for the collection, monitoring and enforcement of taxation. In order to bridge the gap between expenditures, at designated locations and timings, and these erratic and scattered sources, Philip II used financial contracts, asientos.

In a new EHES working paper, Carlos Álvarez-Nogal and Christophe Chamley analyze a contract that provides a splendid illustration of this matching between regular expenditures, erratic revenues from the fleet and scattered but stable local revenues. The contract also provides an example of smooth conversion of short-term debt into long-term funded debt, long before the debt refinancings in England.

The asiento, a financial contract used
by Philip II

The method of investigation of Álvarez-Nogal and Chamley is grounded on a careful and thorough examination of all the documents that are available in the archives of Simancas, which were set by Philip II himself. These archives contain extraordinary details in the contract (14 pages), in the attachments (47 pages) next to the contract, with the reports of the monitoring royal accountants, and, in a different part of the archives, in the audits that were done years later by the Chamber of Accounts (more than 350 pages). From the archives a new and logical structure of the contract emerges that completely contradicts the data reporting and cash-flow method by Drelichman and Voth (2011) about the same contract.

The Maluenda brothers were successful merchants from Burgos who used their network in trade to develop financial activities. On July 13, 1595, they signed an asiento that committed them to deliver twelve monthly disbursements, of 27,000 ducats each (the first was doubled), in Lisbon. (For simplicity, all the numbers are rounded here. The exact numbers are reported in the paper). The total was therefore 350,000  ducats which is in the upper range of asientos for that period. To put this amount in perspective, a total of 5 million ducats of asientos for a given year would be high, the revenues of the Crown, net of Americas' income, were about 10 million ducats,  and GDP per capita in Castile was probably not lower than 2  ducats per month.

The financing of the disbursements (350,000 ducats) was divided in three parts. First, the Crown made an immediate cash payment for the disbursements until August:  75,000 ducats was paid from the royal coffers in Madrid which the bankers had to deliver in Lisbon as soon as possible. This transfer may have been used for urgent or start-up costs.

The credit part of the contract was therefore only for 275,000 ducats. This part operated like a credit line today with a monthly interest of one percent. The contract identified sources of revenues on which it had first claim. The Crown had much flexibility for the use of these sources of revenues and for the timing of the repayments. Whatever the choices of the Crown, a central and repeatedly emphasized principle of the contract was that an interest of one percent had to be charged on the balance due in each month. The rich documentation shows that this principle was strictly applied.
The repayment of the principal of the credit was divided in two tranches, which can be called here Tranche A for 100,000 ducats, and Tranche B for 175,000 ducats. (In addition, interests would have to be paid). Tranche A paid for, roughly, the rest of the monthly disbursements in Lisbon until the end of the year 1595, while Tranche B paid for the disbursements of the following year, until June. The contract devotes much space to the explicit connection between tranche and disbursements.
Each tranche had a first claim on the incom

Lisbon in the early modern period

e of the fleet of its year, the fleet of 1595 for Tranche A, and the fleet of 1596 for Tranche B. However, and this is the most interesting part of the contract, the Maluendas could also collect Tranche B by the sale of long-term funded debt instruments on behalf of the Crown, and they could choose the source of funding. These were to be taken from a menu: annuities on one head, to be chosen by the banker, at 14%, on two heads at 12%, perpetuals at 7% or 6%, and claims on the Casa de Contratación that managed the Crown's revenues from the Americas. Such were the terms of the asiento in the archives. The application of the contract is described in minute details by its attachments and by the final report of the Chamber of Accounts (Contaduria Mayor de Cuentas).

The Maluenda brothers exercised the option soon after the signature of the contract and, not surprisingly, in the menu of instruments, they selected almost exclusively the annuities on two heads. The sales proceeded briskly and were recorded, following a contractual requirement, in trimestral reports, with the names of the buyers, amounts of each annuity and dates of sale. (All this data is in the attachments).

The asiento illustrates the remarkable flexibility of the credit line with a monthly fixed interest rate. The fast sales of the annuities, even before the bankers had made any disbursement on Tranche B (about 105,000 of ducats sold at the end of 1595, before the disbursement of Tranche B), had freed the fleet of 1596 from the claims of Tranche B. It was therefore decided to shift 40,000 ducats in Tranche A from the fleet of 1595 to the fleet of 1596. The payments from the fleet of 1595 were staggered, beginning in December 1595. The attachments to the contract report the careful computations of the royal accountants about the interest on the balance due, prorated for the exact days of payment by the Crown. It is remarkable that for Tranche B, the cumulated sales of annuities exceeded at any time the cumulated disbursements to the Crown!

In November 1596, Philip II stopped the payment on all asientos, for the third time. On Tranche A, 40,000 ducats was still due. They were eventually paid by the Crown.

The method of Álvarez-Nogal and Chamley, to extract from the archives all available information and to focus on one contract, can be compared with the "coding" procedure of all asientos by Drelichman and Voth (2011), as presented in a study that received a prize. In that study, they take the same asiento as a standard bearer for their method which produces tables of "agreed upon cash-flows" from which they compute their own measure of a rate of return. Their method is not historical and in their data reporting, they do not respect the archival evidence in the contract, from page 3 on. The "coding" misses the elegant and logical structure that has been described here, and it turns the contract on its head since the payments depended on the interest, one percent per month, that is specified in the contract and precisely observed in its execution. They inexplicably dismiss the most interesting option for the long-term funded debt (which had already been described in the literature). Ignoring the attachments, they claim instead ("we know with certainty") that Tranche B had not been paid by the payment stop of November 1596, and that it was subject to a debt reduction, when actually, it had entirely been paid, in advance, by selling annuities. In fact, the Chamber of Accounts found in 1606 that for the entire asiento, the Maluenda brothers had been overpaid 4000 ducats.

This blog post was written by Carlos Álvarez-Nogal,  Associate Professor of Economic History at Universidad Carlos III de Madrid and Christophe Chamley, Professor of Economics at Boston Universtiy.

The working paper can be downloaded here:
http://www.ehes.org/EHES_79.pdf

Inequality and poverty in a developing economy: Evidence from regional data (Spain, 1860-1930)

New EHES Working paper by Francisco J. Beltrán Tapia and Julio Martínez-Galarraga

Societies that enter on the path of ‘modern economic growth’ undergo profound transformations. Although most of the changes that accompany this process favour the achievement of higher living standards in the long run, it can also generate some social tensions, especially during the first stages. One of the outcomes associated with growing incomes is the increase in inequality, as stated by Simon Kuznets in his classical work, where he argues that the forces unbounded by economic growth and structural change could initially lead to an upswing of income disparities. Only in more advanced stages of the development process, this trend would be reversed, thus creating the conditions for a more equal distribution of income. Yet, the existence of a U-inverted shape relationship between economic growth and inequality still remains an open debate. While some research provides evidence in favour of the Kuznets’ curve, other work finds conflicting results, so this issue is far from being settled. An important drawback of these studies is that they are mainly focused on the period after World War II due to data availability. However, economic historians have recently made significant efforts to achieve a better understanding of the long-term evolution of inequality.

Following their lead, our article analyses the evolution of inequality and poverty in Spanish regions between 1860 and 1930. This study presents a series of advantages compared to the existing literature. First, the period of analysis corresponds to the early stages of economic growth, which is the centre of Kuznets’ theory. Second, distributional policies were almost non-existing at that time, thus allowing us to focus on the role of economic forces. Third, most international studies employ country-level information, so regional differences are overlooked. This is particularly important in the case of Spain, a country that hides sharp regional disparities, especially in the timing and intensity of industrialisation. Lastly, by focusing on just one country, we reduce the problems that different legal and political regimes impose in cross-country comparisons. Our data also come from the same statistical agencies and thus avoids problems of comparability between different economies, especially acute when comparing data originated in developed and developing countries, or the troublesome conversions of incomes across countries using the purchasing power parity.

In the absence of household surveys or social tables, our inequality measure for each Spanish province is the Williamson Index (WI), an indirect indicator of inequality defined as the ratio between the average income per worker and the wage of unskilled workers. The WI thus compares the bottom of the distribution to the average income. The figure below plots each province’s WI against their level of real income per capita in 1860, 1900 and 1930. Economic growth does not appear to be beneficial for inequality, at least during the early stages of economic growth: the Williamson index increased as incomes grew, a relationship which weakened over time as the Spanish economy developed.

To better assess the distinctive impact of growing incomes on inequality levels, we estimate the determinants of inequality using a panel data set (1860, 1900, 1910, 1920 and 1930) that includes other potential factors influencing this process. The results seem to confirm the presence of the Kuznets curve. However, although growing incomes did not directly contribute to reducing inequality, at least during the early stages of modern economic growth, other processes associated with economic growth significantly improved the situation of the bottom part of the population. In this sense, the population shift from rural areas to urban and industrial centres, the demographic transition and the spread of literacy, among other factors, all partly counterbalanced the initial negative impact of economic growth and helped building a more equal society.

Focusing now on the link with poverty, the literature usually agrees that economic growth is pro-poor. However, recent research promoted by the World Bank stresses that, although growing incomes usually translate into poverty reduction, that relationship is mediated by the presence of inequality. Hence, this strand of literature recognises the importance of both growth and distribution in determining poverty levels. Once again, the links between economic growth, inequality and poverty reduction remain subject to an open debate. Although the lack of information on commodity prices prevents us from being able to compute a subsistence basket for each Spanish province, following Milanovic, Lindert and Williamson (2011), we construct a poverty ratio that compares the unskilled wage to a subsistence wage computed in reference to a fixed subsistence line of 300 $PPP per capita at 1990 prices. Our indicator assesses how far the subsistence wage stands from the earnings of the bottom part of the population. If we plot our poverty measure for each province against the level of real income in 1860, 1900 and 1930, we find that higher incomes per capita were clearly related to lower poverty levels, thus depicting a more positive image of economic development than in the case of inequality. This positive association however almost vanishes as the country developed.

We then carry out a more systematic analysis of the relationship of economic growth and inequality with poverty levels, considering also other variables that might have a direct link with poverty levels. Economic development seems to have opened up new opportunities to wider layers of the population and reduced the poverty ratio, although this positive relationship weakened as incomes per capita grew. Our results also show that inequality and poverty went clearly hand in hand.

To sum up, this article provides two main contributions. We offer new evidence of the evolution of inequality and poverty in Spanish provinces between 1860 and 1930, a period which usually lacks information on these issues and has thus impeded to follow their evolution, as well as a proper assessment of the relationship between these variables and economic development. In this regard, this paper also attempts to assess the causes behind the evolution of these indicators. While growing incomes appear to have fostered inequality (although at a decreasing rate), other processes associated with economic development, such as the rural exodus to urban and industrial centres, the demographic transition and the spread of literacy helped improving the living standards of the lower classes. In addition, the analysis also shows that reducing inequality also contributed to the reduction of poverty levels, so a combination of growth and distribution policies would be doubly beneficial for reducing poverty. Interestingly, the other processes associated with economic growth mentioned above also helped reducing poverty via their effect on inequality. Therefore, the potential of economic growth to improve the lot of the bottom part of the population becomes conditional on its ability to expand the opportunities available to increasingly wider segments of the population.

This blog post was written by Julio Martínez-Galarraga and Francisco J. Beltrán Tapia. 

Francisco J. Beltrán Tapia is 
Junior Research Fellow in Economics, 
Magdalene College, 
University of Cambridge

Julio Martínez-Galarraga is
associate professor at Universitat de València

The working paper is downloadable here: 

http://www.ehes.org/EHES_78.pdf

National income and its distribution in preindustrial Poland in a global perspective.

This blog post was written by Mikolaj
Malinowski, doctoral candidate at
Utrecht University

Why are some people and countries rich whereas other remain poor? What affects the relationship between average per capita income and income inequality? These questions have always been at heart of economics and economic history. According to Kuznets, due to differences in productivity, income inequality in the agricultural sector should be relatively low whereas inequality in the urban sector/industry should be higher. Therefore, at the initial stages of economic growth, progressing urbanisation - the motor of growth - should result in an increase in income inequality in a country. Van Zanden demonstrated empirically that the urban sector has been richer and more unequal already in preindustrial Western Europe. But what about Eastern Europe? Was there indeed a Little Divergence within preindustrial Europe - was per capita income levels in preindustrial Eastern Europe lower than in the western part of the Continent? And, if so, was income inequality in the region lower than in the West?

In their new EHES working paper, Mikołaj Malinowski and Jan Luiten van Zanden of Utrecht University investigate if Kuznets’s reasoning can be also applied to explain economic history of preindustrial Eastern Europe and Poland in particular. Early modern Poland makes an interesting case due to its reliance on the demesne economy based on serfdom. The authors develop the idea that extractive institutions could have resulted in high levels of income inequality despite low productivity/mean income. Malinowski and Van Zanden ask if income inequality in the Polish agricultural sector in the 16th century was indeed lower than in the urban sector, or was it higher due to coercive agricultural class structures. In order to answer this question, the authors construct a social table of the Voivodeship of Cracow – the historical centre of the country – around 1578 and measure Gini income inequality in various sectors of the Polish economy. The authors place their findings in an international context within the framework of the inequality possibility frontier developed by Milanovic and collaborators.

Malinowski and Van Zanden demonstrate that, despite serfdom, income in poor and primarily agricultural Poland was distributed more equally than in more developed/urbanised Holland. Their findings suggest that, due to high inequality in the agricultural sector under serfdom, in the case of preindustrial Poland, urbanisation (movement of labour to a sector with less institutional coercion) could have mitigated rather than increased the inequality of the distribution of incomes. Their findings indicate that a demesne economy based on serfdom might have been very ‘successful’ at extracting surplus from the peasants in general as well as creating inequality between the tenant farmers and the agricultural workers. The level of income inequality in the countryside was at the maximum level determined by the inequality possibility frontier.

In more detail, income inequality in the countryside was primarily attributed to the elite. When the elite is excluded from the estimates of inequality in the agricultural sector, the Gini coefficient decreases drastically from 57 to 30 – a level of income inequality (though not mean income) similar to that observed by Van Zanden for villages in Holland around the same time. Malinowski and Van Zanden also demonstrate - using data on both income and wealth distribution - that the city of Cracow, despite having much higher mean income, was characterised by lower inequality than the agricultural sector. Moreover, income inequality in the whole Voivodeship was smaller than income inequality in the countryside.

Scatter-plotted accounts of income and inequality in preindustrial societies.

Positioning Poland in the debate on early modern income inequality is one objective of the paper. The other is to position Poland within the Little Divergence debate. Malinowski and Van Zanden reconstruct GDP per capita in Poland between 1410 and 1910. They anchor their estimates to their own benchmark estimate for 1578 and to the benchmark proposed by Maddison for 1870. The authors use data on real wages and urbanisation to project the series backwards and forwards in time. The authors propose more reliable benchmarks for 1500, 1578, 1662, and 1776 as well as a more tentative continuous series. The results indicate a moderate growth in the economy in the 16th century, a strong contraction in the 17th century, and a stagnation in the 18th century.

Estimates of GDP per capita in 1990$PPP, 1410-1910.

Malinowski’s and Van Zanden’s inquiry into the long-term growth curve of the Polish economy confirms the conventional knowledge that Poland/Eastern Europe was a European periphery. Their figures reinforce the notion suggested by all of the previous studies of Polish per capita GDP that the county already lagged behind Western Europe in economic development at the end of the Middle Ages. The disproportion between the country and the front-runners located in the North Sea region as well as the other Western European countries widened through the period. The growth in the gap was not only a result of growth of the Western – particularly north-western – European economies, but also by the contraction of the Polish economy. After the 17th century crisis Polish real income went down to a level below that of India or Japan.

GDP per caput around the globe 1500-1870 in 1990$PPP.

This blog post was written by Mikołaj Malinowski, Doctoral candidate at Utrecht University.

The working paper can be downloaded here:
http://www.ehes.org/EHES_76.pdf

Agricultural Risk and the Spread of Religious Communities

New EHES working paper

Is the spread of religious communities related to economic risk? Historically, religious communities have often been the only source of support beyond the family. The social support provided by religious communities appears to be a type of informal mutual insurance especially valuable in historical agricultural societies exposed to much economic risk and without formal insurance mechanisms. Economic risk could therefore have contributed to the spread of today’s major religious communities, and beliefs in the spiritual rewards of mutual aid and charity, but empirical evidence is lacking.

"Stained glass window" by freedigitalphotos.net

In their new EHES working paper, Philipp Ager and Antonio Ciccone use historical census data for the United States to examine the link between economic risk and the spread of religious communities. The authors’ central conclusion is that religious communities are more widespread where populations face greater common risk.

The paper integrates two existing ideas – religious communities can sustain mutual insurance against at least some risks, and religious membership is a social activity that reduces time for other activities – into a model where agricultural output of farmers in a location is subject to idiosyncratic risk and to common, county-level rainfall risk. While idiosyncratic risk is partially insurable within a county’s religious communities, common rainfall risk is not. The authors show that when relative risk aversion is in the empirically relevant range, the value of mutual insurance against idiosyncratic risk within a county’s religious communities increases with common rainfall risk. This implies that a larger part of the population will be members of a religious community in counties with greater rainfall risk, holding expected agricultural productivity constant.

Ager and Ciccone evaluate this hypothesis by examining whether in the nineteenth century United States, churches in counties with greater rainfall risk had more total members or a greater combined seating capacity relative to population. In the United States, religious communities are widely regarded as having been the main source of social assistance, especially in agricultural regions, until the rise of government social spending at the beginning of the twentieth century. The available financial accounts of nineteenth-century churches indicate substantial expenditures on local relief and charity. There is also extensive historical evidence that local religious community members supported each other in case of need. Consistent with the historical narrative and the theoretical analysis the authors find a statistically and quantitatively significant link between membership in religious communities and rainfall risk in 1890, 1870, and 1860.

This blog post was written by Philipp Ager, Assistant Professor of Economics at the University of Southern Denmark, Odense.

The working paper can be downloaded here:
http://www.ehes.org/EHES_74.pdf