A city of trades: Spanish and Italian Immigrants in Late Nineteenth Century Buenos Aires, Argentina

Blanca Sánchez Alonso is professor in 
Economic History at Universidad 
CEU-San Pablo, Madrid

Buenos Aires at the end of the 19th century was a vibrant city. As a political and commercial hub of Argentina, it was a magnet for immigrants from the Old World with a growing demand for unskilled labour.

A large scholarship has studied immigration to Buenos Aires and to Argentina during the era of mass migration (Moya 1998, Baily 1999).  However, we lack, so far, detailed quantitative knowledge on the impact of these flows on labour market. In particular, we are interested in comparing the relative performance of the native workers vis-à-vis the Italian and Spanish immigrants, the largest two immigrant groups, throughout the era of mass migration in Argentina.

Leticia Arroyo Abad is
assistant professor at Middlebury
College

Buenos Aires in 1895 is an extreme case in immigration; the influx of immigrants was so important that only one-third of the male labour force was of Argentinean origin. In 1895, Buenos Aires had nearly 664,000 inhabitants, more than half were foreigners.

Using a new dataset combining individual level census data and a wide array of skilled and unskilled wages, a new EHES working paper looks at labour market participation, human capital, and wealth to assess the performance of Argentineans, Italians, and Spaniards. By classifying the different occupations according to the 1950 IPUMS classification used for the US census, we are able to analyse the labour market in terms of skill composition and skill return.

Male occupation composition by nationality

The findings point at complex effects of immigration on the urban labour market.  (We restrict our analysis to adult males given the data constraints on female wage data). Native workers enjoyed, on average, higher wages than Italians and Spaniards. The labour market rewarded literacy as we observe higher wages rates in more skilled occupations with a higher share of literate workers. Yet, we do not observe systematic native skill upgrading throughout the skill range. In contrast, one distinctive characteristic of the labour market was the relative concentration in different occupations by nationality. Argentines dominated the higher skilled occupations while the Spaniards concentrated in the retail sector and the Italians in the artisan sector.

Male average wages by occupation and nationality

To explain this distribution, we look at the individual characteristics to find that variation in literacy is not consistent with this clustering. Both Spaniards and Italians enjoyed relatively high literacy rates. Following the migration literature, we explore the role of networks as catalysts for integration in the host economy. Ethnic associations played an important role serving as hubs of information and networking and thus decreasing the costs of integration to the new economy. A comparison between the extent and history of local associations shows that the Italian community had a deeper and long-established network in Buenos Aires.

Literacy by occupational group

Overall, this study contributes to our understanding of the performance of labour markets in the presence of large immigrant flows. Buenos Aires at the end of the 19th century welcomed thousands of immigrants. Between 1887 and 1895, these immigrants explain 70% of the total population growth. In this flexible labour market, immigrant workers found their niche based on their skills and aided by the existing networks. With older and deeper network power, Italians had the first mover advantage, a benefit that allowed them to succeed in their adopted country.

This blog post was written by: Leticia Arroyo Abad and Blanca Sánchez-Alonso, Department of Economics, Middlebury College, Vermont, USA and Blanca Department of Economics, Universidad CEU-San Pablo, Madrid, Spain.

The authors thank Timothy J. Hatton and Javier Silvestre for very useful comments and suggestions. This paper also benefited greatly from discussion in the Economic History Seminar of the Universitat de Barcelona and the XI Conference of the European Historical Economics Society (Pisa).

The working paper can be downloaded here: http://www.ehes.org/EHES_88.pdf

References
Baily, Samuel L. (1999). Immigrants in the Land of Promise: Italians in Buenos Aires and in New York City, 1870 to 1914. Ithaca. New York: Cornell University Press.
Borjas, George J. (2003). “The labor demand curve is downward sloping: Reexamining the impact of immigration on the labor market”. Quarterly Journal of Economics 118, 4, pp. 1335–1374.
Hatton, Timothy J. and Williamson. Jeffrey G. (1998). The Age of Mass Migration. Causes and Economic Impact. New York: Oxford University Press.
Moya, José C. (1998) Cousins and Strangers. Spanish Immigrants in Buenos Aires, 1850-1930. Berkeley: University of California Press.
Ottaviano, Gianmarco  and Giovanni Peri. (2012). "Rethinking the Effect Of Immigration On Wages," Journal of the European Economic Association, 10(1): 152-197.

FRESH Meeting on the Economic History of Education

The Frontier Research in Economic and Social History (FRESH) Meeting took place at the

University of Barcelona

University of Barcelona from December 3-4, 2015. Two keynote lectures and 16 presentations focused on the workshop theme “Economic History of Education” and constituted a dense and inspiring program.

The meeting started off with a very inspiring keynote by David Mitch (UMBC Maryland) giving an overview on how the field of “Economic History of Education” had developed during the last 50 years. The keynote’s guiding idea was to contrast the “Economic History of Education” with the developments in financial economic history. When Francesco Cinnirella (ifo Institute) concluded the meeting with the second keynote, focusing on the developments in the field during the past decade and outlining the open topics in the field, it was encouraging to see that most of the topics outlined had been addressed by one of the 16 contributions during the meeting.

How institutions might shape the supply and demand of education was addressed in several papers. In the presentation on “Does centralization foster human capital accumulation? Quasi-experimental evidence from Italy’s Liberal Age”, Gabriele Cappelli (University of Tuebingen) discussed a reform in early 20^th century Italy that allowed municipalities to introduce school autonomy. Nuno Palma (University of Groningen) investigated how growing up under a more or a less autocratic regime in Portugal in the early 20^th century affected literacy in his presentation on “A tale of two regimes: educational achievement and institutions in Portugal, 1910-1950”. A lively debate evolved after the presentation on whether Portugal in the early 20^th century could still be understood as a developing country making the use of height as a measure of living standards viable. Giovanni Prarolo’s (University of Bologna) presentation on “Eight Centuries of Exposure to Pre-Industrial Politico-Economic Institutions and Current Socio-Economic Development. Disaggregated Analysis for Italy” evolved around the question whether pre-industrial institutions in Italy might explain tax evasion today which gave way for further presentations on the matter of persistence.

Felipe Valencia (University of Bonn) presented his paper on “The Mission: Human Capital Transmission, Economic Persistence and Culture in South America” which investigates whether the missions of the Jesuit order in South America had long run-effects on educational outcomes and income.

Piotr Kory (University of Warsaw) and Izabela Korys (National Library of Poland) equally concentrated on long-run effects, by looking at the consequences of the Polish partitions on book reading as a measure of social cohesion in today’s Poland in their presentation on “Literacy, education and development in Polish regions. Do we really observe the long-term effects of partitions?”.

The presentation by Paola Azar (Universitat Autonoma de Barcelona) on “Efficiency gains and fiscal effort Evidence for public education spending (1970 – 2010)” shifted the focus to the financing of education in Latin America. Dacil Juif’s (University of Wageningen) presentation on “The Human Capital of Iberian Jews and Other Minorities during the Inquisition Era” added the aspect of religion to the process of human capital acquisition by using data from the Inquisition’s trials to measure the human capital level of Jews as compared to other parts of the Spanish population.

University of Barcelona

Four presentations evolved around the topic of inequality in education. Jabrane Amaghouss (Cadi Ayyad University) looked at the interplay of inequality in education and economic growth in his presentation on “The Dynamics of the Reduction of Educational Inequalities in Africa”. Marc Goni (University of Vienna) looked at how the provision of schools was affected by the institution of school boards in his presentation “Landed Elites and Education Provision in England and Wales. Evidence from School Boards (1870-1899)”. Julio Martínez-Galarraga (Universitat de Barcelona)  relatedly looked at how the (re-)distribution of land through the Spanish Reconquista affected human capital accumulation in the presentation on “Land access inequality and education in pre-industrial Spain”. Finally, Myung Soo Cha (Yeungnam University) looked at the consequences of land inequality on human capital from the Korean perspective in his presentation “Land Inequality and Human Capital Accumulation in Korea, 1910-2010”.  

Chiara Martinelli (Central Library, Council of the European Union) presented a new dataset on industrial schools in Italy and described the enlargement of industrial and artistic industrial schools in her presentation on “Did Industrial Workers Attend Industrial Schools? A Dataset on Industrial and Artistic Industrial Schools in Italy”.

My (Ruth Maria Schueler, Ifo Institute) presentation shifted the focus to the non-cognitive outcomes of education in the presentation “Nation Building and Social Capital in Prussia: The Role of Education” by investigating whether a higher share of state funds in educational expenditures succeeded in aligning Prussian voters with the state’s ideology.

Finally, a last set of papers evolved around the topics of health and fertility.

Anastasia Driva (University of Munich) investigated the effects of a health reform in Imperial Germany on mortality in the presentation “Compulsory Health Insurance and Mortality”. Maarit Olkkola (UPF and National Institute for Health and Welfare) looked at a special form of birth care in Finland in her presentation on “Poor Cognition – Early-life Socioeconomic Status and Cognitive Abilities in Adulthood. The Helsinki Birth Cohort Study 1934–1939”. Finally, Philipp Ager (University of Southern Denmark) investigated the interplay of agricultural income and fertility.

Not only the range of topics within the field of the “Economic History of Education” which was covered by the presentations was showing an encouraging development in the field, many presentations at the same time also introduced new datasets.

The conference dinner at the seashore of Barcelona nicely complemented the dense program and the local organizers Alfonso Herranz-Loncán and Sergio Espuelas Barroso ensured a smooth sequence of the workshop. Martin Uebele (University of Groningen) represented the FRESH board.  

This blog post was written by Ruth Schüler, Junior Economist and Doctoral Student at Ifo Institute Munich

The Rise of the Middle Class, Brazil (1839-1950)

This blog post was written by Maria Gomez Leon,

researcher in Economic History at 

University of Groningen

The rise of the middle class during the process of economic development has become a major research topic. This has been fuelled by the expansion of this social group in Latin America during the last decade. The Brazilian case is extra interesting due to the country’s recent economic growth accompanied by decreasing inequality, the reduction of absolute poverty and the rise of a new middle class. 

Between 2001 and 2010, Brazil’s GDP per head recorded an average annual growth of 2.4 per cent. Meanwhile, over the same period, 35 million previously poor people entered the middle class, enlarging the size of this class from 38 per cent of the population in 2002 to 53 per cent in 2012. Comparable episodes of rapid economic growth took place in Brazil in the past. Yet, little is known about the evolution of inequality and the presence of a middle class in Brazil over longer periods of time. Did a middle class exist in pre-industrial Brazil? How did it evolve until modern times?

In a recent EHES working paper, The Rise of the middle class, Brazil (1839-1950), I investigate the emergence and evolution of the middle class in Brazil between the mid-nineteenth and mid-twentieth centuries and its connection with inequality. To this purpose Brazil’s income distribution is explored from two dimensions: inequality and polarisation. From the inequality perspective, the paper gets into the debate on whether or not Brazil suffered from persistent inequality from the colonial era by providing a new continual series on Gini estimations. Then, from the polarisation dimension, it contributes by presenting a new middle class index (MCI), based on polarisation measures, which is applied to assess the evolution of the middle class in terms of income and also in terms of status. Notably, to calculate both inequality and polarisation, I use a self-constructed social table involving information on active population structure (by profession) and the income linked to these professional categories, taking into account differences in gender (male or female), condition (free or slave) and area (urban or rural). The investigation aims to fill the gap in the literature on Brazil’s income distribution before the mid-twentieth century as well as provide new insights on when the middle class emerged in Brazil and if there was any connection between the rise of the middle class and inequality.

This work yielded many interesting results. To begin with, results on inequality do not support the idea of persistent inequality in Brazil rooted in the colonial era (Bértola et al, 2012), while they do coincide with the hypothesis of low inequality levels associated with low income values (Milanovic, Lindert and Williamson 2010; Prados de la Escosura 2007). The figure below reflects this idea by showing that my Gini coefficients range between 0.2 and 0.35. It also shows a long-run decline in inequality until 1913, which was interrupted by a short-lived increase during the 1860s, followed by a reduction and a sharp increase from 1913 onwards.

Brazil’s inequality: Gini coefficients

The figure below suggests that low Gini values are quite plausible given the low income levels exhibited in Brazil, especially during the nineteenth century. This figure shows Brazil’s Inequality Possibility Frontier (the maximum attainable inequality for Brazil given its overall income) with the maximum Gini ranging between 0.3 and 0.6. My estimates remained below this frontier, starting from 0.2 at the beginning of the period and growing later from 1913 once GDP per head had begun to increase.

Brazil’s Inequality Possibility Frontier (1850-1950)   

Initially, these inequality trends might be interpreted as supportive of the presence of a middle class over the period, especially up to 1913 (when Gini coefficients were falling) with a reversal thereafter. The alternative interpretation, however, could be that low inequality values in the nineteenth century, since they pointed to low income levels, might have prevented the emergence of the middle class. The opposite could have happened during the twentieth century, when high inequality values could have been linked to an early phase of economic growth in a Kuznetsian sense (that is, to the transitional process from the traditional sector to a modern one), allowing for the appearance of different social groups. 

Ambiguous interpretations can be solved by applying polarisation measures to infer the presence of the middle class. In particular, I propose to use a new middle class index defined as the ratio between tri-polarisation and bipolarisation (further developed in section 3 of the paper). The method allows me to assess the evolution of the middle class evolution in terms of both income and status. Results from the MCI (Figure 3) suggest that the middle class in terms of income arose in the late nineteenth century, when the decline of the slave system led to a more competitive social order. Still, its emergence, in terms of both income and status, should be placed during the first three decades of the twentieth century, in a context of the expansion of industry and modernisation. Yet, between 1930 and 1950, still in a context of urbanisation and growth but increasing inequality and social repression, the middle class started to decline in terms of both income and status.  

Brazil 1839-1950: Middle Class index (according to status and income) 5- year moving averages. 

In summary, substantial social structural change occurred in Brazil over the period under review. The decline of slavery (started in the 1850s), the reduction of inequality (during the late nineteenth century), and the process of modernisation and urbanisation (from the early twentieth century) were crucial factors for the emergence of the middle class. Interestingly, during the early twentieth century, the increase in inequality linked to the increase in wage differences (associated, in turn, with productivity differences) did not impede, but rather fostered the rise of the middle class. Yet, from the 1930s the continuous increase in inequality, along with a low social cohesion, frustrated the consolidation of the middle class and the eradication of absolute poverty.

These results have relevant policy implications for recent theories on the emergence of the middle class in emerging economies in contraposition to their decline in Southern-European countries (after the last global financial crisis) and its connection with inequality. In the short-run: Is inequality when associated with modernisation unavoidable/ favorable to the emergence of the middle class? However, in the long-run: Does inequality impede the consolidation of the middle class even in the presence of economic growth? Another interesting question arising from this research would be the comparison of the rise of the middle class in other transitional economies in the past.

Working paper available here http://www.ehes.org/EHES_91.pdf

References:

Bértola, L., Castelnovo, C., Reis, E., & Willebald, H. (2012). Income Distribution in Brazil in 1870-1920. XVII Jornadas Anuales de Economía, Banco Central del Uruguay, Montevideo.

Milanovic, B., Lindert, P. H., & Williamson, J. G. (2010). Pre-industrial Inequality. The Economic Journal, 121(551), 255–72.

Prados de la Escosura, L. (2007). Inequality and Poverty in Latin America: A Long-Run Exploration. In T. Hatton, K. O'Rourke, & A. M. Taylor (Eds.), The New Comparative Economic History (pp. 291-315). Cambridge, Mass: MIT press.

10th SOUND Economic History Workshop

The 10th SOUND Economic History Workshop took place in Lund, Sweden on the 26-27 November 2015. The two intense days included two keynote presentations and 17 presentations by young scholars.  (You’ll find the blog post on the 9^th SOUND workshop, Copenhagen last year, here.) 

The two keynote speakers were Joan Roses from the LSE, who spoke on the topic of “Regional Inequality in Europe: A long-run view, 1900-2010” on the Thursday, and Karine van der Beek from Ben-Gurion University who spoke on “The relationship between human capital and technological change in 18th century England”. Both keynotes were in my mind exemplary in that they gave engaged introductions to the key debates in their respective fields – regional perspectives on economic development, the role of human capital or not during the first industrial revolution. Hearing directly from leading researchers in different fields how they think about their previous and current research, as well as their reflections on debates they are engaged in (was human capital really important for Britain’s industrial revolution?) is always enlightening, and for someone who works neither on regional perspectives nor the British industrial revolution, both talks were fascinating and rewarding.

First day keynote address by Joan Rosés, LSE

The paper presentations were no less interesting. It was a refreshingly hardcore economic history program, full of quantitative studies of well-defined issues. I noted that among the 17 presentations, 10 included the year span of the study, while another four included periodizations (“interwar period”, “19^th century”, “pre-industrial Europe”, “late-Victorian Briain”). All the studies were empirical and most of them brought forward new data, or used old data in thoroughly new ways. The way it should be in economic history, if you ask me.

The morning session of the first day included Oisín Gilmore (University of Groningen) on “Working Time in Industry (1870-2000): A new dataset”, Andrea Papadia (LSE) on “Fiscal Capacity, Tax Composition, Decentralization and the Cyclicality of Government Revenues in the Interwar Period”, and Karol Borowiecki (University of Southern Denmark) on “The Role of Immigrant Artists on the Development of Artistic Clusters in Major U.S. Cities: 1850 to the Present”. Oisin’s study relates to the well-known studies of Michael Huberman of working hours c. 1870–1910, and points out that actually, when it comes to work-time reduction in Europe, most of the action is around 1920, after Huberman’s data ends but before Maddison’s data begins. As someone working on the eight-hour day legislation in Sweden in 1920, naturally I was very sympathetic to this presentation. Andrea’s presentation concerned measuring “fiscal capacity” in the interwar years, looking at tax revenues and their volatility. One of the discussions around this paper was the classical one about how to capture causality in a historical case, how well the instruments work, etc. I think that by now it’s not really an economic history workshop if you don’t have this discussion about at least one of the papers! Karol’s presentation looked at the immigration of different type of artists to the US – actors, composers, etc. – where they ended up in the US, and what kind of labor economics effects their arrival had on native-born artists in these locations.

The second session was a very pan-Scandinavian one, including Edda Torsdatter Solbakken from Statistics Norway on “The distribution of tax and wealth in the early 19th century”, Cristina Victoria Radu from University of Southern Denmark on “The effect of serfdom on labor markets”, and Ewa Axelsson from Umeå University on the saw mill industry in northern Sweden 1880-1910. Edda Torsdatter Solbakken’s paper exploits a peculiar 19^th century wealth tax design in Norway. To fund the setting up of a national central bank, a wealth tax was introduced, but without comprehensive investigations into the actual wealth of citizens. One might therefore suspect that some powerful citizens might have understated their own wealth to pay less tax, and this is the research question of the presented paper. Cristina Victoria Radu’s paper looks at a Scandinavian historical reform of another kind: the abolition of one kind of serfdom in early 18^th century Denmark and then the re-introduction of another version of it. Radu uses the temporal variation in workers’ freedom to estimate the effects on wages of serfdom. Ewa Axelsson presented not a paper per se but her dissertation work, on the environmental and social effects of the saw mill industry’s domination in a region in northern Sweden during industrialization in the late 19^th century and early 20^th century. For example, companies had voting rights in Swedish municipalities during this period, so in quite a few of the municipalities in this region, a majority or near majority of votes were held by sawmill companies: a fascinating historical case for political economy analysis. I might be biased since I’m Scandinavian, but I thought that this was a superb session, with three extremely interesting studies of various forms of inequality and power in 18^th-19^th century Scandinavia.

The Thursday afternoon session included again three presentations, all which introduced novel datasets: Chiara Martinelli from Università di Firenze on “Industrial and artistic industrial schools in Italy - A new provincial dataset”, presented for the first time very detailed maps on the location industrial and artistic schools in Italy. Kristoffer Collin from Gothenburg University talked about the wage structure during the First Industrial Revolution in Sweden, with a paper based on new data on industrial wages from 1860–1879. Lastly, Alexander Donges from University of Mannheim presented a paper on patenting activity during Germany’s Early Industrialization, arguing that railway construction was a leading sector and that technology transfers were crucial in Germany’s early industrialization. Donges presented a novel dataset of German patents for the period before 1877.

Unfortunately I missed the conference dinner, at an Italian restaurant in downtown Lund, so I can’t give you a restaurant review. But from what I heard the food was good, and from the somewhat later than scheduled timing of arrivals the morning after, I infer that people had fun too. J

Second day keynote lecture by Karine van der Beek, Ben-Gurion University 

After Karine van der Beek’s keynote, Friday’s first paper session included Kathryn E. Gary from Lund University speaking on ”Women’s wages in pre-industrial Europe: Evidence from Scandinavia”, Brian Varian from the LSE speaking on “The revealed comparative advantages of late-Victorian Britain”, and Jason Lennard from Lund University speaking on “A Short Monetary History of Ireland, 1840-1921”. Kathryn Gary presented work on early modern wages in Sweden and Denmark based on new archival research, bringing forth new information about the extent of women’s work in this period (for example, surprisingly widespread employment of women as building workers in 17^th century Sweden), as well as on wage differentials. Brian Varian’s paper concerned late-19^th century British exports and their competitiveness, building on extensive statistical work. Jason Lennard’s paper, co-authored with Sean Kenny also from Lund University, likewise brought forward much new data, in this case on monetary aggregates for 19^th century and pre-independence Ireland. Overall, a session heavy on new data, very encouraging!

The session after lunch started with myself, Erik Bengtsson from Lund University, talking about “Capital shares and income inequality: Evidence from the long run”, a paper co-authored with Daniel Waldenström of Uppsala University. Then came Cristián Ducoing from Umeå University, with a paper called “A Sustainable Century? Genuine Savings in developing and developed countries, 1900-2000”, and the final presentation of the session was Henric Häggqvist from Uppsala University on “Was It All Protectionism? – The Structure of Swedish Tariffs 1780–1830”. (Henric has since defended his dissertation successfully, so congratulations Dr. Häggqvist!) Without having a headline, I think this session could still be summed up as a kind of “historical macro” session: Cristián’s presentations and my own were both oriented to historical national accounts in different ways (mine from the income side, Cristián’s from the expenditure side), and Henric’s concerned new estimates of tariffs and trade for different goods in Sweden from 1780 to 1830.

The final session included two presentations: Alexandra López Cermeño from Universidad Carlos III de Madrid on “The localisation of big cities: destiny or chance? United States 1930-2010”, and Leonard Kukic from the LSE on “Socialist growth revisited: Insights from Yugoslavia”. Alexandra López Cermeño focused on the role of universities in generating local spillo-vers and urban economic growth using up-to-date econometric techniques. , Leonard Kukic on the other hand took a novel approach to the general discussion about the efficiency of planned economies in the post-war period, showing for Yugoslavia that TFP was not the most quantitatively significant cause of Yugoslav failure. Rather, he finds that, labour frictions were a major constraint on socialist growth.

To sum up, I thought that this was a really great workshop. Good keynotes held by senior scholars who also participated in discussions of the papers in helpful and critical ways, 17 purposeful and focused presentations and lots of good discussion, with a plenty of participation and comments, made for a very stimulating experience. Kudos to the SOUND organizers Kerstin Enflo (Lund) and Jacob Weisfdorf (University of Southern Denmark), and especially to the local organizers, PhD students Thor Berger and Hana Nielsen!

Lastly, special thanks to financiers Handelsbankens Forskningsstiftelser for making this workshop possible. 

This blog post was written by Erik Bengtsson,
postdoc in Economic history at Lund University

Did monetary forces cause the Hungarian crises of 1931?

Flora Macher is a PhD student at
London School of Economics

Financial crises are a “hardy perennial” and while their recurrence never fails to cause substantial economic loss, on the positive side, researchers of financial history have a long record of episodes that they can use as a comparative reference when they are analyzing the one crisis just occurring. 

A recent EHES working paper by Flora Macher illustrates that there is a clear parallel between the recent sub-prime crisis and a financial crisis of the Great Depression era. The example shows that financial crises are a “hardy perennial” not only in a sense that they never cease to return but also that they always seem to arise from the same human folly.

US politicians, in their drive to increase their popularity, advocated the increase in home ownership in the 1990s and early 2000s and thus chose to promote mortgage lending. For almost a decade, everything seemed perfectly fine, in fact, more than fine. The period was an economic miracle: the fiscal side was solid, monetary conditions were easy, and everybody, even those without income could buy a house. The catch was that unfunded liabilities were accumulating in the financial system and before anyone could identify their existence, the housing bubble blew up and the well-known sub-prime crises started to unfold.

Hungary underwent almost exactly the same events on its march to the Great Depression. In the years leading to the crisis of 1931, Hungarian authorities used the banking system for populist measures catering to the needs of their constituency and helping them to maintain their political power. The only difference from today was that Hungarian policy-makers tried to win over the public not by raising home ownership but by providing subsidies to the agricultural sector.

Hungary was on the losing side after World War I; it suffered significant territorial losses and incurred reparations obligations based on the Peace Treaty of Versailles. Economic, social, and political turmoil followed in the years after the war. Since domestic capital fled or was obliterated and foreign financiers avoided the country, authorities had to resort to the central banks’ printing press to finance the ever increasing expenses of social demands. The subsequent hyperinflation could not be ended by domestic means as the domestic public was unwilling and unable to finance the government deficit through increased taxation. Eventually, Hungary rid its economy from the hyperinflation through a foreign loan arranged by the League of Nations in 1924. (Bácskai 1999) Nonetheless, the stabilization loan was conditional upon the League’s long-term surveillance which demanded a balanced government budget, forbade government borrowing and required full commitment to a legislatively set gold parity through an independent central bank that refrained from financing government debt and constrained its liquidity provision to the economy. Under these circumstances, fiscal and monetary policy had no room whatsoever to yield to domestic social demands.

Nevertheless, domestic political pressures were substantial. The stability of the government was dependent on the support of landed interest. (Romsics 1991) Large landowners’ demands were a top priority for the administration as the aristocracy retained a powerful role in shaping Hungarian politics, and Prime Minister Bethlen himself belonged to this class. The interests of small landowners and farm laborers, who made up over half of the workforce, also had to be satisfied in order to maintain social stability, which rested on very shaky grounds due to widespread poverty. (Ungváry 2013) Under these conditions, economic fragility and rising unemployment had to be avoided.

Since the short leash set by the League and the international creditors behind the reconstruction loan did not allow policy-makers to spend on domestic political interests, authorities had to find a channel through which they could still address the political pressure but, at the same time, not invite the criticism of international institutions and keep foreign capital flowing in. The banking system, enjoying the backing of the monetary and the fiscal authority, hence became a strange guarantor of domestic, and especially agricultural interests. The central bank developed a strong positive bias towards the rediscount of agricultural bills even during a period of restrictive monetary policy to ensure lending to this sector. The government provided substantial guarantees for farm lending. These were indirect means of support from the authorities to the financial system through which banks could inject “stimulus” into the economy and satisfy the political constituency of the ruling regime.

The flipside of this arrangement was that the financial system was assuming all the risk for the economic stimulus, a role that the authorities themselves were unable to pursue. As a result of the policies of indirect stimulus, the banking system became excessively exposed to the agricultural sector.

The share of agricultural lending in total lending (click to enlarge)

However, when in 1930 the country experienced an agricultural crisis, approximately 50-60% of banks’ equity was wiped out by defaults within months. Thus by the end of 1930, the financial system was already highly vulnerable to shocks and eventually experienced a collapse in July-August 1931. Years of recession and long-term slow economic growth was the outcome of meddling with the banking system and then seeing it fall apart. The post-crisis recession lasted until mid-1932 and the four years of crawling recovery afterwards only landed Hungary’s economy at 1926 levels by the end of 1936.

Domestic national income, million pengős (click to enlarge)

Although the US sub-prime episode and the Hungarian debacle of 1931 can be traced back to the same political folly, there is a significant difference in how the two crises were managed once the events were unfolding. Hungarian authorities responded by reinforcing conservative fiscal and monetary measures: monetary policy restrictions, constraints on the flow of capital, and austerity in government spending. The US followed the same route in the fiscal arena and cut back on government spending. In the monetary field, however, US authorities implemented counter-cyclical measures and started on a path of monetary easing that is still the determining policy action today. The US economy fell into a recession in 2009 but within two years it recovered and by today it is 10% above its pre-crisis size.

Comparing the US sub-prime crisis with Hungary’s 1931 events suggests that even though humans will never cease to indulge themselves to short-term gain, we do still improve on how we clean up the mess once a tragedy of excesses has occurred. The new, unorthodox monetary policy actions of today’s central banks are an intriguing experiment with money supply in a modern economy. While its long-term impact is still unclear, in the short-term, it has proved much more effective than the crisis responses to the 1931 calamities.

The blog post was written by Flora Macher, LSE
The working paper is downloadable here: http://www.ehes.org/EHES_86.pdf

A closer look at the long-term patterns of regional income inequality in Spain: the poor stay poor (and stay together)

The publication of the 2010 Eurostat Regional Yearbook provides evidence to portray regional (NUTS2) income inequality in the European Union. Several features stand out. First, the wealthiest region, Inner London, has a per-capita GDP that is 3.24 times greater than the EU-27 average. Besides, Inner London’s per-capita GDP is 12 times that of Severozapaden (Bulgaria), the poorest region. Nevertheless, regional disparities do not just correspond to extreme cases, since a total of 68 regions have income levels less than 75% of the EU-27 average. In addition, the geography of regional inequality in Europe follows a well-defined and persistent spatial pattern, in which wealthy regions are clustered around a continental axis that stretches from the north to the centre of Europe (or the blue banana). These differences and their implications, have become a serious concern for economists and policymakers, and have fuelled the study of regional inequality.

From an economic history perspective it is worth noting the efforts to construct regional GDP estimates (Rosés and Wolf, forthcoming), thereby enabling researchers to make further progress in the study of long-run trends. That has also been the case of Spain. For a rather small territorial scale, province (NUTS3), novel per-capita GDP estimates allow us to create a decadal-dataset beginning in 1860 and ending in 2010. With these data, our aim is to analyse the long-run evolution of regional income inequality in Spain in terms of convergence and dispersion, and also evaluate aspects related to the income distribution, e.g. modality, mobility, spatial clustering. For this, a new EHES working paper by  Alfonso Díez-Minguela, Julio Martinez-Galarraga and Daniel A. Tirado makes use of various exploratory tools: kernel density estimates, boxplots, transition probability matrices, Shorrocks indices, Kendall’s τ, Moran’s I and LISA maps.

We begin our analysis looking at the long-run evolution of regional per-capita GDP inequality. In this sense, Williamson (1965) conjectured that along the process of economic development regional disparities exhibited an inverted U-shaped pattern, with increasing inequality in the early stages, mainly late 19th century, and convergence thereafter. Our results confirm this hypothesis for Spain 1860-2010. As figure 1 illustrates, there was an upswing in regional income inequality, measured with a population-weighted coefficient of variation (WCV), from 1860 to 1920. From then on, convergence across Spanish provinces prevails. However, this downward trend came to a halt in the last decades of the 20th century, and it might be reversing. Moreover, the U-shaped pattern has also been found in other European countries (i.e. Britain, France, Italy, Portugal) though not in Sweden and Belgium.

Figure 1. Regional (NUTS3) income inequality (WCV), Spain 1860-2010 (1860=1)

In Spain, during the early stages of modern economic growth, roughly 1860-1930, market integration was underway and modern technologies were becoming more widespread. With the advent of industrialisation, some Spanish provinces (Barcelona, Vizcaya) specialized in manufacturing, and thus regional inequality increased. Regional disparities were mainly due to the presence of a small group of rich provinces and a large majority of poor ones. This, in turn, stretched the upper tail of the distribution. Regional inequality thus reflected a small group of wealthy provinces and a majority of (relatively homogeneous) poor ones. However, this was compatible with moderate but sizeable mobility in income distribution insofar as the ranking of provinces underwent some changes. Furthermore, from a geographical perspective, relative income levels had a limited relationship with the location of territories within Spain. Spatial clustering, although statistically significant, was not very high, due mainly to the limited number of wealthy provinces. This would be consistent with the presence of poles with few non-contiguous dynamic provinces. 

Since the 1930s, regional disparities gradually declined. Even more, this coincided with the appearance of bimodality in the distribution, which came about not only due to a lessening of the differences between rich and poor, but also to the homogenisation of rich and poor. From 1930 to 2010 regional mobility declined, whereas spatial clustering increased. In this respect, Figure 2 shows the degree of spatial clustering (in terms of per-capita GDP) in 2000. To identify the geographic position of rich (poor) provinces and the degree of spatial autocorrelation, the figure presents Local Indicators of Spatial Association (LISA) of regional income inequality. In the map, blue coloured provinces illustrate the clusters with low per-capita GDP, while red ones reflect those that exhibit high levels.

Figure 2. Spatial clustering. LISA map, 2000

In short, although differences between rich and poor provinces decreased, their relative positions remained fairly stable. Therefore, in terms of policy-making, there are two main features that characterise regional economic inequality in Spain since the Civil War (1936-39). Firstly, there is a quasi-non-existent mobility in class or rank, i.e. provinces have somewhat retained their 1940 relative positions. Hence, the historical trajectories cannot be labelled as an American Dream or Nightmare on Elm Street. Quite the opposite, a marked stability is observed between 1920 and 2010. Secondly, there is a high degree of spatial correlation. This was already present in the previous period (1860-1930), but it has consolidated during the second half of the 20th century. Consequently, a map with ‘two Spains’ arises, where wealthy provinces are located in the north-east while the poorest ones cluster in the south. Bearing this in mind, spatial polarisation becomes a major concern. 

As a result, there appears to be little prospect of improvement for low-income regions that are located further away from the dynamic nodes. Regional policies, mainly applied during the late 20th century, might have had a short-term impact on relative income levels, but they have been unable to alter the long-term dynamics. In addition, the rise of an economic cluster in the north-east of the Iberian Peninsula may be a sign of the crucial and growing relevance of European markets. Interestingly, the centre of gravity has been gradually shifting from the south-west to the north-east. Greater openness and the accession to the EU have strengthened this movement. In recent years the relative poverty of the southern and western Spanish provinces has increased and the spatial polarization of income today is more striking than ever. European economic integration can only reinforce this tendency. Therefore, in the case of Spain, further European political and economic integration calls for the design of territorial cohesion policies aimed at counteracting the structural elements of economic regional inequality highlighted above.

References:

Rosés, J.R. and Wolf, N. (forthcoming). The economic development of Europe’s regions: a quantitative history since 1900 (New York: Routledge).

Williamson, J.G. 1965. ‘Regional inequality and the process of national development: a description of the patterns’. Economic Development and Cultural Change 13:4, Part II, 3-84.

This blog post was written by: Alfonso Díez-Minguela, Julio Martinez-Galarraga and Daniel A. Tirado (Universitat de València)

The working paper can be downloaded here: http://www.ehes.org/EHES_87.pdf

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