Coming back to @PostOffice #Savings? The #east-west comparative.

Postal financial services, development and inclusion: Building on the past and looking to the future

By

Gonzales d’Alcantara (gonzales.dalcantara@ua.ac.be) Emeritus Professor of Econometrics at the University of Antwerp and d’Alcantara Economic Consulting

Paul H. Dembinski (pawel.dembinski@unifr.ch ) University of Fribourg, Switzerland

Odile Pilley, (odile.pilley@blueyonder.co.uk) International Consultant, formerly with International Bureau of the Universal Postal Union

Abstract: Post offices, inherited from the Industrial Revolution, were monolithic telephone and postal administrations. They were intimately linked to the fabric of nations and made significant contributions to state finances. From the 1960s onwards, integrators, such as UPS and FEDEX, started offering end-to-end express services, thus challenging the postal monopoly in new high added value services. Gradually, the liberalization paradigm gained ground. Telecommunications and sometimes financial services were spun off from postal operations. More recently, new policies and priorities started to emerge especially on the development agenda where financial inclusion has become a top priority in the developing world. The question to be addressed is which role, if any, the posts play or could play in ensuring inclusion. Despite an exceptionally scarce research in the field, this paper provides an overview of how these shifts in paradigm have affected postal policy, the postal financial services regulatory framework, the status of the organizations delivering those services and the offerings themselves in developing as well as in developed countries. After a research review, including the regulatory dimension, the paper focuses on how postal financial services institutions in their legal framework have developed bringing to the fore a panorama of a dozen of promising transformations of financial postal services in developing countries.

URL http://EconPapers.repec.org/RePEc:fri:fribow:fribow00451

Review by Mark Crowley

This paper by d’Alcantara, Dembinski and Pilley was circulated byNEP-HIS on 2014-09-12. The approach is unique in the sense that it seeks to compare the nature of Post Offices in Europe and the developing world, focusing primarily on their role in the savings movement. Its historical approach shows how the western Post Offices developed as a movement that sought to encourage thrift among a profligate working class, whereas in the developing world, the development of a Postal Savings movement was more in line with the growing financial markets across these nations, and the desire for individual customers to express choice in their banking processes. Moreover, it effectively shows how, following a crisis in trust experienced in the banking industry, more people across both the developed and developing world are turning to the government-backed Post Office as a safe haven for their savings in response to the perceived dangers of investing in private banks.

Summary

Citing the latter nineteenth century as the beginning of the Post Office savings movement, with British Prime Minister William Gladstone’s initiative to open a Post Office Savings Bank, this paper demonstrates that the influence of the government over consumer spending has long roots. The authors deftly show that certainly in its embryonic stages, the Post Office savings movement in developed countries focused on the provision of a secure place for working-class savings, while also encouraging thrift. Building on the lack of trust displayed by the working-class towards other alternatives, such as friendly societies, and their exclusion from private sector banks, the savings option offered by Post Offices had fertile ground on which it could flourish.              
 
gladstone 2

The paper also documents the differences between the supervisory natures of the Post Office Savings activities in developing countries, comparing them to that in the developed world. Citing the Asian and Latin American examples, the authors show that the levels of government control over the activities of postal savings banks were significantly more than that in the developed world, with the respective central banks exerting a supervisory role over postal and financial affairs. In the developed world, following with the liberalisation of financial services, the level of central government control over deposits made in postal savings banks has significantly diminished, with initiatives to delegate the administration of post office banking activity to private banks. Although responsibility is still being underwritten by central government (with Bank of Ireland UK as the example for postal savings in the UK) the level of micro-management previously present has now diminished.

d’Alcantara, Dembinski and Pilley also document the necessity of a world legal framework and understanding to evolve with the growing influence of the postal savings movement, especially in the developed world. Citing the aim for legal and financial autonomy to be awarded to postal savings institutions as part of the United Nations millennium goals, it effectively demonstrates the challenges that both the developed and the developing world face in terms of striking the right balance to facilitate the effective supervision of the financial system at a time when the role of private investment banks have been criticised for their excessive risk taking. While many countries in the west still pride themselves on liberal nature of their governments and markets, the definition of this is likely to change in the name of ensuring proportionality and responsibility concerning financial affairs in an age when consumer confidence in private banks is at an all-time low.

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While seeking to emphasise the differences between the postal savings movement in the developed and developing world, this paper also draws on examples of convergence. In the period after the 2008 world financial crisis, there has been evidence that consumers, once more, have come back to the government-backed Post Office savings banks in response to not only their anger about the actions of private banks, but also the perception that government-backed savings institutions are safer in terms of securing deposits during periods of financial crisis. For example, in 2008, much resentment was created in the UK when the government bailed out banks deemed “too big to fail”, costing the taxpayer billions of pounds. While such action ensured that the deposits of savers were guaranteed, many responded angrily that taxpayer’s money was being used to save banks that had shown financial irresponsibility on such a grand scale.

post office uk

The paper ends on an optimistic note for the savings movement in Asia, with particular reference to China. In noting that the Chinese Postal Savings Bank is the fourth largest in China, with its customer base expanding beyond the traditional labouring classes to include students and businesspeople, the authors argue that this has been a triumph for the postal savings movement in the world’s most populous country. While it is worth noting that the level of central government control over all banks in China is possibly significantly more than in any other developed nation, it is a point well made that in a country with a flourishing middle class population, it is the postal savings movement that seems to be gaining the biggest traction.

posb china

Critique

d’Alcantara, Dembinski and Pilley covered a huge chronological and geographical period in their analysis, and have effectively compared the nature of the postal savings movement in the developed and developing world. Perhaps an area that could be explored further is the western government’s ideas of financial liberalisation as a principle that stops short of a full-scale privatisation of Post Office counters (which include financial services)? For example, Margaret Thatcher, despite pursuing a very ambitious privatisation programme in the 1980s, stopped short of privatising Post Office counters, despite taking steps to remove the ‘Giro’ from government control. Deeming the issue to be too much of a political hot potato, Thatcher left financial services at the Post Office largely untouched, encouraging only the intervention of private banks to compete for the option of underwriting (with the support of government) Post Office financial services. Today, both in the US and the UK, Post Office counters, and individual postmasters complain vehemently about their struggle for survival in the face of growing competition from private banks that now include the offers of financial services by supermarkets, and initiatives that have reduced the numerous functions of Post Office counters, including direct debit payments. Perhaps the question the authors could explore is why do western governments, while taking efforts to remove services from the Post Offices (such as bill payments) do not embark on a full scale privatisation, whereas in developing countries, where the extent of government control over the savings movement, including postal savings, is significantly stronger, the movement appears to be going from strength to strength?

Further Reading

Booth, Alan and Mark Billings, ‘Techno-nationalism, the Post Office and the creation of Britain’s National Giro’ in B Bátiz-Lazo, J.C. Maixé-Altés and P. Thomes Technological Innovation in Retail Finance: International Historical Perspectives (Abingdon: Routledge, 2011).

Campbell-Kelly, Martin, ‘Data Processing and Technological Change’ Technology and Culture, 39, 1 (Jan. 1998), pp. 1-32.

Campbell Smith, Duncan, Masters of the Post: The Authorized History of Royal Mail (London: Penguin, 2011).

Crowley, Mark J. Saving for the Nation: The Post Office and National Consumerism, c1860-1945’ in Erika Rappaport, Sandra Dawson and Mark J Crowley (eds.), Consuming Behaviours: Identity, Politics and Pleasure in Twentieth Century Britain (forthcoming Bloomsbury, 2015).

Failed by #EconomicGrowth?

Asia’s Little Divergence: State Capacity in China and Japan before 1850

by Tuan-Hwee Sng (National University of Singapore) and Chiaki Moriguchi (Hitotsubashi University)

Abstract: This paper explores the role of state capacity in the comparative economic development of China and Japan. Before 1850, both nations were ruled by stable dictators who relied on bureaucrats to govern their domains. We hypothesize that agency problems increase with the geographical size of a domain. In a large domain, the ruler’s inability to closely monitor bureaucrats creates opportunities for the bureaucrats to exploit taxpayers. To prevent overexploitation, the ruler has to keep taxes low and government small. Our dynamic model shows that while economic expansion improves the ruler’s finances in a small domain, it could lead to lower tax revenues in a large domain as it exacerbates bureaucratic expropriation. To test these implications, we assemble comparable quantitative data from primary and secondary sources. We find that the state taxed less and provided fewer local public goods per capita in China than in Japan. Furthermore, while the Tokugawa shogunate’s tax revenue grew in tandem with demographic trends, Qing China underwent fiscal contraction after 1750 despite demographic expansion. We conjecture that a greater state capacity might have prepared Japan better for the transition from stagnation to growth.

URL: http://econpapers.repec.org/paper/hithitcei/2014-6.htm

Reviewed by Joyman Lee

Summary

This paper was distributed by NEP-HIS on 2014-09-25 and 2014-10-03. In it Sng and Moriguchi ask why China – with its large population and high levels of technological prowess – was not the first country to industrialize. Existing studies of “divergence” have not explained differences in economic performance between China and Japan. Despite the similarities between the two economies in levels of proto-industrialization, political and legal structures, and living standards. Sng and Moriguchi argue that differences in public finance accounted for important differences in the two countries’ ability to promote economic growth.

In this paper Sng and Moriguchi focus on the important question of size and geography as the central explanatory variable. In particular, the authors develop a context-specific model which suggests that rulers’ need to rely on agents to govern (principal-agent problem) in a pre-modern dictatorship meant that “agency problems increase with its geographical size and heterogeneity” (p5), owing to information challenges which precluded close supervision by rulers of their agents. The model predicts that the larger the polity, the higher the corruption rate, and the lower the tax rate out of fear that subjects will revolt, as expropriation reduces the ruler’s ability to provide social goods commensurate to the tax levied. The higher level of corruption also reduces rulers’ incentives to invest, and hence the provision of public goods per capita. Graft and inefficiencies mean that population and economic growth actually reduces the proportion of the economic surplus available to the ruler. As a result, the size of the polity lowers the tipping point where the negative effects of growth outweigh the positive effects.

Qing military officials. Qing China had a chronic corruption problem.

Qing military officials. Qing China had a chronic corruption problem.

Sng and Moriguchi test their hypothesis against a pool of primary and secondary data, which confirms that tax rates were higher in Japan than China, averaging around 34% in Japan (rising to 50-55% in some domains, p29): more than twice of China’s level in 1700 and approximately six times by 1850. Population growth was far greater in China than Japan, where the population stagnated after 1700. Compared to the Qing, Tokugawa Japan enjoyed a higher level of public services in terms of coinage, transportation, urban management, and environmental management (forestry), and in famine relief the Qing’s strengths were cancelled out by 1850. The authors conclude that the large size of China “imposed increasingly insurmountable constraints on the regime’s capacity to collect taxes and provide essential local public goods as its economy expanded,” and that “this factor alone might have been sufficient in holding back China’s transition from stagnation to growth even in the absence of Western imperialism” (p38). In line with the existing scholarship, Sng and Moriguchi contend that Japan’s healthier tax system provided the Westernizing Meiji regime (1868-1912) with revenues to conduct far-reaching reforms.

Comment

Despite its significance in global history, the comparative history of China and Japan is surprisingly overlooked. The “California school,” for instance, has focused largely on the economic “divergence” between China and the West, whereas Japanese economic historians have labored over Japan-Europe differences (Saito 2010). Sng and Moriguchi’s focus on the comparative history of China and Japan is thus relatively new. The authors join political scientist Wenkai He, whose recent book Paths toward the Modern Fiscal State also explores China’s failure to develop a modern fiscal state in the nineteenth century, in comparison with early modern England and Meiji Japan (He 2013). China’s “failure” is especially puzzling in view of the Qing’s overall success in raising revenue in the late nineteenth century (Wong 1997, 155-56).

Sng and Moriguchi’s argument that a state’s ability to increase revenue is inversely affected by size is persuasive. In the absence of institutions to monitor graft, China had seldom been able to pursue rational fiscal strategies – especially at the county level – since the Tang-Song transition (Hartwell 1982, 395-96). In contrast, Japan’s decentralized polity in the early modern period bore close resemblance to Europe. Perhaps unsurprisingly, early modern Japan’s experiences of proto-industrialization and industrious revolution had clear parallels both in England and in the Netherlands.

A magistrate's office in Jiangxi province. Arguments on the Qing's inadequacies hinge partly on the Qing's ideological goals.

A magistrate’s office in Jiangxi province. Arguments on the Qing’s inadequacies hinge partly on the Qing’s ideological goals.

What this narrative does not explain, however, is why China pursued such an inefficient mode of fiscal management. Given the challenges of graft and the fear of revolt, Sng and Moriguchi assume that it was the most rational or “optimal” course. The authors point to but dismiss lightly the question posed by Qing historians that the goals of the late imperial Confucian state might not have been compatible with “rational” state expansion. In other words, rather than fearing peasant revolt, the choice of tax rate might have to do with ideological reasons. Similarly, the idea that the Japanese state shared a “Confucian” outlook (p4) is overly simplistic, especially as consistently high levels of taxation in Tokugawa Japan undermine the idea that Tokugawa Japan was a “benevolent” state.

While size might have been a key variable in China’s state “weakness,” this does not in itself explain the strengths or weaknesses of China’s overall economy. The large size of China’s internal market, for example, allowed differentiation and specialization which appear to have sustained economic growth even in the absence of an active state. This was true both in the Qing and more recently in China’s informal and private sectors since 1978. Thus there is no reason to assume that the adoption of a “modern” fiscal apparatus was a natural goal for the Qing before 1850. Similarly, by focusing on the state’s fiscal abilities to the exclusion of other factors, Sng and Moriguchi also sidestep an important Japan-centered literature that considers how similarities in economic structures between China and Japan enabled the results of Westernizing experiments in Japan after 1850 to be transferred to China. This point is important because revenues from Japan’s trade with Asia propelled Meiji Japan’s economic growth, no less than the revenues collected by Japan’s indigenous tax structures. Moreover, this was a form of self-sustaining growth built upon constant competitive pressures from below, i.e. from China which was rapidly reproducing strategies developed in Japan (ed. Sugihara 2005).

Despite these criticisms, Sng and Moriguchi’s model offers clear quantitative analysis on an important aspect of a greatly understudied topic, and is recommended for anyone interested in the longue durée economic development of the two countries.

Additional References

Hartwell, R. 1982. “Demographic, Political, and Social Transformations of China, 750-1550,” Harvard Journal of Asiatic Studies, vol. 42, no. 2, pp. 365-442 [Dec, 1982].

He, W 2013. The Paths toward the Modern Fiscal State: Early Modern England, Meiji Japan, and Qing China. Cambridge, MA: Harvard University Press.

Saito, O. 2010. “An Industrious Revolution in an East Asian Market Economy? Tokugawa Japan and Implications for the Great Divergence,” Australian Economic History Review, vol. 2010, vol. 50, issue 3, pp. 240-261.

Sugihara, K. (ed.) 2005. Japan, China, and the Growth of the Asian International Economy, 1850-1949. New York: Oxford University Press.

Wong, R. 1997. China Transformed: Historical Change and the Limits of European Experience. Ithaca, NY: Cornell University Press.

On #Trade, #Globalization, #Development and Steamships

The Wind of Change: Maritime Technology, Trade and Economic Development

by

Luigi Pascali (L.Pascali@warwick.ac.uk) University of Warwick (UK) and Pompeu Fabra University (Spain)

ABSTRACT

The 1870-1913 period marked the birth of the …first era of trade globalization. How did this tremendous increase in trade affect economic development? This work isolates a causality channel by exploiting the fact that the steamship produced an asymmetric change in trade distances among countries. Before the invention of the steamship, trade routes depended on wind patterns. The introduction of the steamship in the shipping industry reduced shipping costs and time in a disproportionate manner across countries and trade routes. Using this source of variation and a completely novel set of data on shipping times, trade, and development that spans the great majority of the world between 1850 and 1900, I …find that 1) the adoption of the steamship was the major reason for the …first wave of trade globalization, 2) only a small number of countries that were characterized by more inclusive institutions bene…fited from globalization, and 3) globalization exerted a negative effect on both urbanization rates and economic development in most other countries.

URL: http://econpapers.repec.org/paper/wrkwarwec/1049.htm

Review by Natacha Postel-Vinay

The 1870-1913 period saw the first significant wave of trade globalization, which introduced important economic and social changes throughout the world. Despite an abundant literature on the causes of globalization at the time, there are significant methodological issues with these studies. Even more surprisingly, very little has been said about the impact of globalization in this era on the economies of countries around the world. In particular, an essential question to ask seems to be whether the increase in trade witnessed at the time was conducive to greater economic development worldwide.  In a highly ambitious move, Luigi Pascali’s paper (distributed by NEP-HIS on 2014-07-13) tackles both issues at the same time, and in so doing contributes significantly to the larger debate on the causes and consequences of trade globalization.

The main challenge in answering these two questions is to deal in each case with an endogeneity problem. Start with the causes of the trade boom. In their attempts to determine whether the rise in international trade could be due to transportation costs, authors have often used freight rates as a proxy for these costs. The problem with this approach is that freight rates are the actual price of transportation. They may be affected by factors which are themselves related to the state of trade (such as demand for goods or economic activity). So causation may not actually run from freight rates to trade – but from other factors related to trade to freight rates.

A similar issue arises when looking at the causal relationship (if any) from trade to economic development. As economic activity may itself have a positive impact on trade – and not just the other way around – a researcher dealing with this question may find a positive correlation between the two but will eventually be faced with a potential endogeneity problem.

Pascali found a creative solution to these difficulties. He did so by making use of the fact that the steamship introduced asymmetric changes (ie. exogenous variation) in trade distances between countries.  Before the steamship, shipping times by sail were mainly determined by wind patterns. The steamship therefore introduced greater changes in shipping times between some countries than between others. Such changes were purely independent of other factors affecting trade, and only linked to such things as the direction of wind and water currents. It thus became possible for the author to examine the effect of a large change in shipping time on trade, independent of other factors linked to trade such as economic activity or market structure.

Clipper ship from the 1850s.

Clipper ship from the 1850s.

To compute such a variable, Pascali built an enormous dataset on sailing times (using such variables as velocity and direction of sea-surface winds) and calculated the likely effect of the adoption of the steamship on shipping times for 129 countries between 1850 and 1900. He also expanded available datasets to include more than 5,000 entries on imports and exports and data on urbanization for more than 5,000 different cities.

What he found was that the introduction of the steamship had a much larger (positive) impact on trade than was previously thought.

Pascali also found that he could use the steamship variable to search for causal links running from trade to greater income levels and development. As mentioned above he had isolated changes in shipping times including the influence of countries’ economic activity. But these changes were strongly related to trade itself. They were then used as instrumental variable in a two-stage least squares (2SLS). In other words, this variable effectively dealt with the endogeneity problem in the analysis of the effects of trade on development.

His results were somewhat surprising. Using this variable as an instrument, the regression of development (urbanization, population density and per-capita GDP) on trade yielded mostly significant but negative coefficients on the explanatory variable. It therefore appears that variation in the intensity of trade between two locations does not have a large impact on development – and may even have a negative one.

Even more interestingly, his findings suggest that whether an increase in trade has a positive impact on development depends on a country’s institutions:  only a few countries having a better established rule of law (as measured by “constraints on the executive” – taken from Acemoglu and Johnson (2005)) benefited from an increase in international trade in terms of development. This finding can be related to relatively recent literature (such as Krugman (1991) or Crafts and Venables (2007)) according to which a reduction in trade costs is only beneficial to a certain set of countries (in particular, those specializing in manufacturing).

A steamship from the 1900s.

A steamship from the 1900s.

Pascali’s paper thus contributes to questioning the positive effects of lowering trade barriers, which are too often taken for granted. He carefully suggests that trade may have a differential impact depending on countries’ institutions. Perhaps some elaboration and discussion on how exactly these relationships play out would have been welcome.  Nevertheless the author’s questions, creative methodology and findings all make for a fascinating read.

Additional References

Acemoglu, D. and S. Johnson (2005). “Unbundling institutions”. Journal of Political Economy 113(5): 949–995.

Crafts, N. and A. Venables (2007). Globalization in Historical Perspective. University of Chicago Press.

Krugman, P. (1991). “Increasing returns and economic geography”. Journal of Political Economy 99: 483-499.

Who Will Get the Bill? Lessons from #EconHis on Scottish Independence #indyref

State dissolution, sovereign debt and default: Lessons from the UK and Ireland, 1920-1938

by

Nathan FOLEY-FISHER (nathan.c.foley-fisher@frb.gov)  Federal Reserve Board

Eoin MCLAUGHLIN  (eoin.mclaughlin@st-andrews.ac.uk) University of St Andrews

ABSTRACT

We study Ireland´s inheritance of debt following its secession from the United Kingdom at the beginning of the twentieth century. Exploiting structural differences in bonds guaranteed by the UK and Irish governments, we can identify perceived uncertainty about fiscal responsibility in the aftermath of the sovereign breakup. We document that Ireland´s default on intergovernmental payments was an important event. Although payments from the Irish government ceased, the UK government instructed its Treasury to continue making interest and principal repayments. As a result, the risk premium on the bonds the UK government had guaranteed fell to about zero. Our findings are consistent with persistent ambiguity about fiscal responsibility far-beyond sovereign breakup. We discuss the political and economic forces behind the Irish and UK governments´ decisions, and suggest lessons for modern-day states that are eyeing dissolution. “Further, in view of all the historical circumstances, it is not equitable that the Irish people should be obliged to pay away these moneys” – Eamon De Valera, 12 October 1932 –

URL: http://econpapers.repec.org/paper/zbwqucehw/1406.htm

Review by Anna Missiaia

The current public debate on the possible secession of Scotland has largely focused on the economic effects for Scotland (as opposed to the rest of the UK). Paul Krugman’s eloquent post “Scots, What the Heck?” warns on the monetary issues that would arise after a victory of the “yes” to Scottish independence on September 18th, while Martin Wolf’s article “What happens after a Yes vote will shock the Scots” explains how Scotland would face years of negotiations and uncertainty before settling down. All of which would come at a cost.  But do all economic consequences of independence really fall exclusively on those who leave?  Economic history can bring some insights on the matter.

scots

The paper by Nathan Foley-Fisher Eoin McLaughlin was circulated by NEP-HIS on 2014-09-05. This research explores how the Irish independence of 1921 was dealt with in terms of public debt inheritance by Ireland.  

After independence and as a result of the negotiations on sovereign debt, the Irish committed to repay land bonds that were previously used to implement a land reform in that country. In 1932 the Irish Government decided to stop interest and principal repayments of these bonds. Ireland effectively defaulted on public debt that it had inherited from the UK. However, the Irish default had no consequences on bondholders because the British Government decided to asume those liabilities and continue with the payments.

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Foley-Fisher and McLaughlin looked at the evolution of the spread between Irish land bonds and the “regular” British bonds to assess the reaction of investors. Their methodology was very intuitive and straightforward: it encompassed the identification of structural breaks in the spread series to assess which events affected the risk premium.  The two main breaks correspond to the Anglo-Irish War, during which there was an elevated risk of default by farmers and the second one in 1932, when the possibility of Ireland defaulting on the land bonds started to emerge.  

Irish_War_Of_Independence

The estimates of Foley-Fisher and McLaughlin suggest that that the increased spread (originated by both breaks) remained “high” long after independence and in spite of the formal commitments by both the Irish (to repay) and British (to guarantee payments). Following the Irish default, the spread return to zero once the UK Government started to repay bondholder.

The authors identify several reasons why the British Government decided to back the Irish rather than pass the burden of the default on to the bondholders. These reasons included the relatively contained cost for the UK Treasure, the fact that most bondholders were based in the UK and the fear by the UK to be accused of a lack of commitment. Therefore, the cost of the default was greater for the British. Foley-Fisher and McLaughlin also point out that the willingness by the British to take up such a burden depended on the particular situation between Ireland and the UK. In other cases, such as the default of Newfoundland in 1932, the British government was happy to let its former colony default as the consequences of this default was low or negligible for British bondholders.

scots2

In summary, the paper by Foley-Fisher and McLaughlin goes straight on to the point, is well organised and engaging. With a fairly simple empirical strategy they show insights that are easily read by economic historians but also those who are now commenting the Scottish referendum. The “take home” message from this history is the following: after independence, a risk premium on inherited public debt has to be paid and this risk premium can be requested by investors for many years after secession. The Treasury of the former union might (or not) decide to guarantee all the former debt in case the new independent state decides to default. However, the choice of doing so depends on many factors, and these factors are not all foreseen. In the words of Martin Wolf: “however amicably a divorce begins, that is rarely how it ends” and the wealthy abandoned spouse might decide to guarantee for the debts of its other half. Or not.

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Soltaire courtesy of Chilanga Cement

Technology and Financial Inclusion in North America

Did Railroads Make Antebellum U.S. Banks More Sound?

By Jeremy Atack (Vanderbilt), Matthew Steven Jaremski (Colgate), and Peter Rousseau (Vanderbilt).

Abstract: We investigate the relationships of bank failures and balance sheet conditions with measures of proximity to different forms of transportation in the United States over the period from 1830-1860. A series of hazard models and bank-level regressions indicate a systematic relationship between proximity to railroads (but not to other means of transportation) and “good” banking outcomes. Although railroads improved economic conditions along their routes, we offer evidence of another channel. Specifically, railroads facilitated better information flows about banks that led to modifications in bank asset composition consistent with reductions in the incidence of moral hazard.

URL: http://econpapers.repec.org/paper/nbrnberwo/20032.htm

Review by Bernardo Bátiz-Lazo

Executive briefing

This paper was distributed by NEP-HIS on 2014-04-18. Atack, Jaremski and Rousseau (henceforward AJR) deal with the otherwise thorny issue of causation in the relationship between financial intermediation and economic growth. They focus on bank issued notes rather deposits; and argue for and provide empirical evidence of bi-directional causation based on empirical estimates that combine geography (ie GIS) and financial data. The nature of their reported causation emerges from their approach to railroads as a transport technology that shapes markets while also shaped by its users.

Summary

In this paper AJR study the effect of improved means of communication on market integration and particularly whether banks in previously remote areas of pre-Civil War USA had an incentive to over extend their liabilities. AJR’s paper is an important contribution: first, because they focus on bank issued notes and bills rather than deposits to understand how banks financed themselves. Second, because of the dearth of systematic empirical testing whether the improvements in the means of communication affected the operation of banks.

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In 19th century north America and in the absence of a central bank, notes from local banks were substitutes among themselves and between them and payment in species. Those in the most remote communities (ie with little or no oversight) had an opportunity to misbehave “in ways that compromised the positions of their liability holders” (behaviour which AJR label “quasi-wildcatting”). Railroads, canals and boats connected communities and enabled better trading opportunities. But ease of communication also meant greater potential for oversight.

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ACJ test bank failure rates (banks that didn’t redeem notes at full value), closed banks (ceased operation but redeem at full value), new banks and balance sheet management for 1,818 banks in existence in the US in 5 year increments between 1830 and 1862. Measures of distance between forms of communication (i.e. railroads, canals, steam navegable river, navegable lake and maritime trade) and bank location emerged from overlapping contemporary maps with GIS data. Financial data was collected from annual editions of the “Merchants and Bankers’ Almanac”. They distinguish between states that passed “free banking laws” (from 1837 to the early 1850s) and those that did not. They also considered changes in failure rates and balance sheet variance (applying the so called CAMEL model – to the best of data availability) for locations that had issuing banks before new transport infrastructure and those where banks appear only after new means of communication were deployed:

Improvements in finance over the period also provided a means of payment that promoted increasingly impersonal trade. To the extent that the railroads drew new banks closer to the centers of economic activity and allowed existing banks to participate in the growth opportunities afforded by efficient connections.(p. 2)

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Railroads were the only transport technology that returned statistically significant effects. It suggested that the advent of railroads did indeed pushed bankers to reduce the risk in their portfolios. But regardless of transport variables, “[l]arger banks with more reserves, loans, and deposits and fewer bank notes were less likely to fail.” (p.20). It is thus likely that railroads impact banks’ operation as they brought about greater economic diversity, urbanisation and other measures of economic development which translated in larger volume of deposits but also greater scrutiny and oversight. In this sense railroads (as exogenous variable) made banks less likely to fail.

But ACJ note that means of transportation were not necessarily exogenous to banks. Reasons for the endogeneity of transport infrastructure included bankers promoting and investing in railroads to bring them to their communities. Also railways could find advantages to expand into vigorously active locations (where new banks could establish to capture a growing volume of deposits and serve a growing demand for loans).

Other empirical results include banks decreased the amount of excess reserves, notes in circulation and bond holdings while also increased the volume of loans after the arrival of a railroad. In short, considering railroads an endogenous variable also results in transport technologies lowering bank failure rates by encouraging banks to operate more safely.

Comment

The work of AJR is part of a growing and increasingly fruitful trend which combines GPS data with other more “traditional” sources. But for me the paper could also inform contemporary debates on payments. Specifically their focus is on banks of issue, in itself a novelty in the history of payment systems. For AJR technological change improves means of payment when it reduces transaction costs by increasing trust on the issuer. But as noted above, there are a number of alternative technologies which have, in principle, equal opportunity to succeed. In this regard AJR state:

Here, we describe a mechanism by which railroads not only affected finance on the extensive margin, but also led to efficiency changes that enhanced the intensity of financial intermediation. And, of course, it is the interaction of the intensity of intermediation along with its quantity that seems most important for long-run growth (Rousseau and Wachtel 1998, 2011). This relationship proves to be one that does not generalize to all types of transportation; rather, railroads seem to have been the only transportation methods that affected banks in this way.(p4)

In other words, financial inclusion and improvements in the payment system interact and enhance economic growth when the former take place through specific forms of technological change. It is the interaction with users that which helps railroads to dominate and effectively change the payments system. Moreover, this process involves changes in the portfolio (and overall level of risk) of individual banks.

The idea that users shape technology is not new to those well versed in the social studies of technology. However, AJR’s argument is novel not only for the study of the economic history of Antibellum America but also when considering that in today’s complex payments ecosystem there are a number or alternatives for digital payments, many of which are based on mobile phones. Yet it would seem that there is greater competition between mobile phone apps than between mobile and other payment solutions (cash and coins, Visa/Mastercard issued credit cards, PayPal, Bitcoin and digital currencies, etc.). AJR results would then suggest that, ceteris paribus, the technology with greater chance to succeed is that which has great bi-directional causality (i.e. significant exogenous and endogenous features). So people’s love for smart phones would suggest mobile payments might have greater chance to change the payment ecosystem than digital currencies (such as Bitcoin), but is early days to decide which of the different mobile apps has greater chance to actually do so.

Wall Street (1867)

Wall Street (1867)

Another aspect in which AJR’s has a contemporary slant refers to security and trust. These are key issues in today’s digital payments debate, yet the possibility of fraud is absence from AJR’s narrative. For this I mean not “wildcatting” but ascertaining whether notes of a trust worthy bank could have been forged. I am not clear how to capture this phenomenon empirically. It is also unlikely that the volume of forged notes of any one trusted issuer was significant. But the point is, as Patrice Baubeau (IDHES-Nanterre) has noted, that in the 19th century the technological effort for fraud was rather simple: a small furnace or a printing press. Yet today that effort is n-times more complex.

AJR also make the point that changes in the payments ecosystem are linked to bank stability and the fragility of the financial system. This is an argument that often escapes those discussing the digital payments debate.

Overall it is a short but well put together paper. It does what it says on the can, and thus highly recommended reading.

About the Historic Gap between Rich and Poor Italians

Economic Inequality in Northwestern Italy: A Long-Term View (fourteenth to eighteenth centuries)

By Guido Alfani (Bocconi University)

URL: http://econpapers.repec.org/paper/dondonwpa/061.htm

Review by Emanuele Felice

Summary

The pioneering work by Simon Kuznets placed the evolution and determinants of economic inequality as one of the central subjects in economics and economic history. The recent success of Thomas Piketty’s latest book (see the Book Reviews section of the NEP-HIS Blog) bears witness to inequality being a topic of great interest to a wider public.

However, constructing reliable estimates of inequality for pre-industrial times is a highly-demanding task. This is the ultimate reason why, in spite of good theorizing and much speculation about the subject, we have so few “actual” figures for the Middle Ages and the Modern Era. The paper by Guido Alfani contributes to the latter, thus quenching our thirst for historical data. Indeed, other than van Zanden’s (1995) seminal work on the Low Countries, Alfani’s is the only comprehensive and thorough study of inequality for a large geography (i.e. the Piedmont region) over a long period of time (from the first half of the 14th century to the early 19th century). Moreover, Alfani provides some good interpretative hypotheses and viable explanations for the observed patterns: here there is much to think, and to learn, about the history of pre-industrial societies.

Guido Alfani

Guido Alfani

The article is well-organized and aims to expose as clearly as possible sources and methods − including some thorny, technical issues. Following an introduction where the relevance of the subject is highlighted in the context of previous systematic studies, a first section provides an overview of the progressive extension of and the fiscal reforms introduced by the House of Savoy into the Piedmont (from circa 1350 onwards). By the late 18th century the House of Savoy had become the most expansionist and successful of all the Italian states. However, it was perhaps not the most powerful one as the Bourbon’s rule in the south (i.e Naples and Sicily in the 17th and 18th centuries) was considerably larger and commanded more resources.

The Fountain of Life by  Giacomo Jaquerio ( c. 1375 – 1453) [one of the main exponents of Gothic painting in the Piedmont].

The Fountain of Life by Giacomo Jaquerio ( c. 1375 – 1453) [one of the main exponents of Gothic painting in the Piedmont].

In section 2, Alfani details the sources for his database. These included records of taxable property (estimi or catasti), which the communities of Piedmont compiled in order to distribute the fiscal burden among households. This because they had to decide how to pay the tasso, a direct tax imposed for the first time in 1562 which by the early 17th century had grown into the main fiscal instrument of the Sabaudian domains. About this source Alfini comments:

The “estimi” are particularly convenient for conducting large-scale studies, as they show an impressive stability through space and time. (p.8)

The Italian estimi can be divided in two categories: “per property” which include lands and buildings and were more common; and “per yield” which include capital, credits, and other movables.

Alfani points out that all the sources used in his estimates are based on estimi per property, which thus only track one of the components of wealth, real estates. But he also adds that there is good reason to believe that in pre-industrial societies (which were largely agricultural) wealth inequality is a good proxy of income inequality as the size of land holdings would determine income. Thus income and wealth would tend to move in the same direction − even more as they do today.

Based on the per property estimi, Alfani constructs a database made up of 16 communities and 12 times series. These include six cities and six series of rural communities (it is noted that seven rural communities are grouped in three aggregates, plus other three individual rural communities). This database is impressive indeed. The actual locations it covers are scattered throughout the Piedmont region, with benchmark years stretching from 1311 (Chieri) until 1772 (Saluzzo). A total of 55 estimi were used.

The Piedmont region is noted for its wine and cuisine

The Piedmont region is noted for its wine and cuisine

Sections 3 to 6 offer the main results of the article. In Section 3 he calculates and discusses a Gini index for each of the 55 estimi analysed. Other measures of inequality include the share of wealth owned by the top 5% and 10% of the population as well as inter-decile ratios. Section 4 delves into a discussion about the impact of disease and pandemics on inequality, from the Black Death to epidemics in the 17th century. Section 5 presents estimates of inequality at the regional level for the whole of the Piedmont: specifically estimates of Gini coefficients from the 16th to the end of the 18th centuries, which are then compared with those estimated for the Low Countries by van Zanden (1995). In this section Alfani also calculates the share of wealth owned by the top 10% and 5% at regional level from the 14th to the end of the 18th centuries.

gap4

Comment

From Alfani’s analysis, several findings stand out. Among these, the positive correlation between urban demographic growth and inequality, the fact that cities experienced greater inequality levels than rural areas, or the prominent role of the top rich in determining inequality changes. The most important result, however, is yet another one: the evidence that in Piedmont, during the Early Modern period (16th and 17th centuries), inequality was on the rise, both in cities and in rural areas, and independently from whether the economy was growing or stagnating. As the author states:

«This is a new finding that directly challenges earlier views that tended to explain inequality growth as the consequence of economic development.»(p. 43)

In this respect, it could even be argued that the well-known Kuznets curve should be relativized to a short phase of human history, the Industrial Revolution. This finding also has an impact on the debate about the Italian decline in the 17th century (e.g. Cipolla 1952), insofar as it provides empirical confirmation for an established literature (e.g. Romano 1972) holding that the Italian decline was also due to rising inequality, which reduced the opportunity for productive investments and the size of the national market, at a time of growing international competition.

2011-474--weight-gap-between-rich-and-poor-

Equally important can be the results about the consequences of epidemics for inequality. In this case, Alfani’s inquiry does not confirm earlier hypotheses based on Tuscan data (actually, on the Tuscan city of Pistoia), according to which after the Black Death there was a rise in inequality (Herlihy 1967). The case study of Piedmont tells us quite the contrary, and appears to be consistent with a vast literature stressing the decline of inequality due to higher wages, after the Black Death. The opposite, however, occurred after the plague of the 17th century: now, the rise in inequality (or at least the fact that in the medium term the plague did not prevent inequality from rising) was probably due to «the institutional adaptation that occurred in-between» (p. 44); namely, to the creation of institutions that prevented the fragmentation of inheritance, and thus of real estates, such as the fideicommissa. Quite correctly, in my view, the author reminds us that after the Black Death adaptation to a new environment, where epidemics had become endemic, occurred:

«and for the human species, adaptation also means institutional adaptation» (p. 23).

Alfani_Calamities and the Economy_Palgrave, London, 2013

References

Cipolla, C.M. (1952) ‘The Decline of Italy: The Case of a Fully Matured Economy’, The Economic History Review, 5(2): 178-187.

Herlihy, D. (1967) Medieval and Renaissance Pistoia: The Social History of an Italian Town, 1200-1430. New Haven, CO: Yale University Press.

Romano, R. (1972) ‘Una tipologia economica’, in R. Romano and C. Vivanti (eds.), Storia d’Italia. I caratteri originali. Turin: Einaudi, pp. 254-304.

Van Zanden, J.L. (1995) ‘Tracing the beginning of the Kuznets curve: Western Europe during the early modern period’, The Economic History Review, 48(4): 643-664.

Immigration and the Economy: An Interdisciplinary Subject

Immigrant Diversity and Economic Development in Cities: A Critical Review

By Thomas Kemeny (London School of Economics)

Abstract: This paper reviews a growing literature investigating how ‘immigrant’ diversity relates to urban economic performance. As distinct from the labor-supply focus of much of the economics of immigration, this paper reviews work that examines how growing heterogeneity in the composition of the workforce may beneficially or harmfully affect the production of goods, services and ideas, especially in regional economies. Taking stock of the existing literature, the paper argues that the low-hanging fruit in this field has now been picked, and lays out a set of open issues that need to be taken up in future research in order to fulfil the promise of this work.

URL: http://econpapers.repec.org/paper/cepsercdp/0149.htm

Revised by: Anthony C. Evans (final year graduate Business Studies & Marketing, Bangor University – Wales)

Summary

Kemeny’s paper was circulated by NEP-HIS on 2013-12-06 and it seeks to understand the relationship between immigrant diversity and economic performance, primarily by considering the effects of “interactions among a diverse populace” (p.1).

The review is motivated by the theory that “immigrant-diverse individuals could simultaneously improve economic outcomes by bringing together different perspectives and heuristics, and reduce performance by making co-operation more costly.” (p.2) This additional cost of co-operation is associated with Tajfel’s (1974) Social Identity theory, and is supported by the quoted findings of Richard et al. (2002), Bandiera et al. (2005) and O’Reilly et al. (1989); that teams who share few commonalities find it hard to integrate and suffer from reduced co-operation and higher staff turnover. Empirical studies by Hoffman and Maier (1961) and Joshi and Roh (2009) are cited, and display a modest positive economic impact of workplace diversity.

TomKemeny-238x239

Kemeny quotes Ottaviano and Peri’s (2006) findings that a 0.1 increase in the Fractionalization index increased native wages by 13% and rents more so within the US. Kemeny (2012) and Spaber (2010) find similar results, as does Bellini et al.’s (2013) European work. Alesina et al.’s (2013) global study finds birthplace diversity is positively related to GDP per capita and total factor productivity, with the strongest association in rich countries for high-skill workers.

However, Kemeny notes that many studies, including Suedekum et al.’s (2009) study of Germany and Nathan’s (2011) study of the UK, have demonstrated a negative economic effect of immigrant diversity, especially upon those in lower skilled jobs.

Citing empirical studies by Stephan and Levin (2001), Bosetti et al. (2012) and Hunt and Gauthier-Loiselle (2010), immigrant diversity is found to be positively linked to the number of research papers published and to the number of patent applications for highly skilled industries.

Kemeny finds that there is inconsistent evidence as to the link between immigration and entrepreneurship in Mariano et al. (2012), Audretsch et al. (2010) and Cheng and Li’s (2011) extant work.

imgres

Through his review Kemeny identifies a number of stylised facts across the relevant literature. Some of these follow.

The paper refers to a growing body of work supporting Bakens et al.’s (2013) findings that the individual’s characteristics emerge as the primary determinants of variation in wages and rents. Kemeny proposes individual heterogeneity may overstate diversity’s positive impact upon productivity, as immigrants may self-select areas based upon higher wages, personal interests and their skill level. The validity of the shift share instruments used to address reverse causality rely upon initial waves of immigrants having chosen locations based upon extra-economic concerns, which likely may not be the case.

Kemeny’s (2012) previous work finds that wages in areas with high levels of social capital, often promoted by regional institutions, are typically 7% higher than those living in equally diverse areas with lower levels of social capital, a consideration not accounted for by other authors.

Overall the paper finds little consensus as to the impact of team diversity within the organizational literature.

Several issues with the measurements currently used are highlighted. Productivity gains for lower-skilled labour may not necessarily result in wage increases, and process innovation within this segment may not be patented. Kemeny cites Alesina et al.’s (2013) findings that skin colour or language spoken at home are less likely to result in production complementarities than social values are. Their research finds ethnic fractionalization and birthplace diversity are largely unrelated, whilst birthplace also fails to capture the importance of second-generation immigrants. Under Roback’s (1982) Spatial Equilibrium, higher wages may either reflect greater productivity brought about by diversity, or compensate workers for the disutility of living in a diverse area. Because of this paradox one cannot determine from wages alone how productivity and diversity may be linked.

Kemeny condemns an inherent assumption of urban studies; that “bio-diversity reflects intellectual diversity” (p.35) and contends “the idea that national culture shapes heuristics and perspectives ought to be subject to empirical validation.” (p.37)

Kemeny argues, that based upon the literature reviewed, diversity is generally positively related to wages, and either rents, productivity or cultural amenities, with least square analysis’ demonstrating the direction of causality is from diversity to economic gain. It is reasoned that this indicates the productivity augmenting effects of immigrant diversity outweigh the cost of transacting across cultures.

Kemeny proposes that further work into the role of institutions, the relative importance of city specific manifestations of diversity and the differing impact of diversity between skill levels and industries would advance this modern field.

imgres

Critique

Value and Implications of the Research

Kemeny provides a useful viewpoint by combining the findings of both economic geography and organizational theory. In identifying limitations in the methodologies of both fields, future work can seek to address these issues and generate a better understanding of the relationship between immigrant diversity and economic development. This understanding may help inform frequently inaccurate (Economist, 2013) popular debates on immigration, which argue that immigration results in fewer jobs for natives (Kemeny, 2013) and a drain on state welfare (Economist, 2013). Furthermore greater understanding of how immigration affects the economy should result in better-informed immigration policy. The finding that institutions can augment economic gains may be beneficial to both immigrants and natives, and represent a pragmatic way to enhance the quality of life for both parties.

Limitations and Future Research

By omitting the level at which quoted results were found to be statistically significant, the paper makes it difficult to interpret the frequently contradicting results of the various research cited.

One issue Kemeny fails to address is whether mild racial or cultural preferences can produce extreme segregation in urban areas, as is illustrated by Schelling’s (1978) famous checkerboard model. Becker (1971) observed that the economic penalty to employers who display taste-based discrimination increased as the size of the group being discriminated against increased, therefore larger populations of immigrants should experience less discrimination and thus higher wages than smaller populations. Further discussion of the link between immigration and discrimination, and the economic impact of the latter may provide valuable insight to public policy debate and formulation.

Whilst Kemeny addresses the fact that many studies fail to acknowledge that individual competencies play a significant role, an issue the research does not expand upon is difference between immigrants of different cultural backgrounds. Immigrants from nations with similar language and cultural values will experience lower transactional costs (Rokeach, 1979), which correspond with Hofstede’s (2001) organizational research findings. Goodhart (2013) finds significant differences in economic prosperity between immigrants of different national origin in Britain during the 20th Century.

Whilst a controversial topic it must be noted that the recent consensus in psychology research is that there is a strong heritability of “intelligence” (Bouchard, 2004). As measures of “intelligence” have been shown to be linked to wage differentials (Benjamin et al. 2012), then it should be considered that the economic prosperity brought by immigrants may be related to their genetic makeup and enhancing genetic diversity (Ashraf and Galor, 2013; Ager and Bruckner, 2013). There is a growing body of work in this field of genoeconomics, broadly covered in Benjamin et al. (2012) and Navarro’s (2009) reviews of the existing literature, which could further enhance Kemeny’s spatial economics paper.

An additional source of heterogeneity is the individuals’ decision to emigrate. Ruiz and Vargas-Silva’s (2013) work finds that forced migration produces different economic effects to that of voluntary migration. An improved understanding of the reason for immigration may help explain the differences between skilled and unskilled labour, as one could hypothesise that those in skilled segments may be moving due to prearranged employment. The effect of capital stock brought by immigrants is also not considered, which would increase the steady state under the Solow (1956) model.

With the growing economic importance of Asia and Latin America (Mpoyi, 2012) future research considering immigration from the West to these nations would be of value to this field.

References

Ager, P.; Bruckner, M.; (2013) Immigrants’ Genes: Genetic Diversity and Economic Development in the US. Munich Personal RePEc Archive. Paper No. 51906

Ashraf, Q. and Galor, O. (2013) The ‘Out of Africa’ Hypothesis, Human Genetic Diversity, and Comparative Economic Development. American Economic Review. Vol. 103(1) pp.1-46

Becker, G. (1971) The Economics of Discrimination. 2nd Edition. University Of Chicago Press. Chicago.

Benjamin, D.; Cesarini, D.; Chabris, C.; Glaeser, E.; Laibson, D.; Guðnason, V.; Harris, T. et al. (2012) The promises and pitfalls of genoeconomics. Annual Review of Economics. Vol. 4 pp.627-662.

Bouchard, T. (2004) Genetic Influence on Human Psychological Traits: A Survey. Current Directions in Psychological Science. Vol. 13(4) pp.148-151

Goodhart, D. (2013) The British Dream: Successes and Failures of Post-war Immigration. Atlantic Books. London.

Hofstede, G. (2001) Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations. 2nd Edition. Sage Publications. Thousand Oaks, CA.

Kemeny, T. (2013) Immigrant Diversity and Economic Development in Cities: A Critical Review. Spatial Economics Research Centre. London School of Economics. Discussion Paper 149

Mpoyi, R. (2012) The Impact of the “BRIC Thesis” and the Rise of Emerging Economies on Global Competitive Advantage: Will There Be a Shift from West to East? Journal of Applied Business & Economics. Vol. 13(3) pp.36-47

Navarro, A. (2009) Genoeconomics: Promises and Caveats for a New Field. Annals of the New York Academy of Sciences. Vol. 1167 pp. 57–65

Rokeach, M. (1979) Understanding Human Values. The Free Press. New York. NY.

Schelling, T. (1978) Micromotives and Macrobehavior. Norton. New York, NY.

Solow, R. (1956) A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics. Vol. 70(1) pp. 65-94

The Economist (Dec 21st 2013) British immigration. You’re Welcome.

The Economist (Nov 9th 2013) Little England or Great Britain.

Zhang, J. (2009) Tipping and residential segregation: a unified Schelling model. IZA Discussion Papers. No. 4413