Category Archives: Uncategorized

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.

The institutional co-evolution of proto-multinationals

The Formative Years of the Modern Corporation: The Dutch East India Company VOC, 1602-1623

By Oscar Gelderblom (University of Utrecht), Abe de Jong (Erasmus University Rotterdam) & Joost Jonker (Universities of Amsterdam and Utrecht)

URL: http://ideas.repec.org/p/ems/eureri/32952.html

Abstract

With their legal personhood, permanent capital with transferable shares, separation of ownership and management, and limited liability for both shareholders and managers, the Dutch East India Company (VOC) and subsequently the English East India Company (EIC) are generally considered a major institutional breakthrough. Our analysis of the business operations and notably the financial policy of the VOC during the company’s first two decades in existence shows that its corporate form owed less to foresight than to constant piecemeal engineering to remedy original design flaws brought to light by prolonged exposure to the strains of the Asian trade. Moreover, the crucial feature of limited liability for managers was not, as previously thought, part and parcel of that design, but emerged only after a long period of experimenting with various, sometimes very ingenious, solutions to the company’s financial bottlenecks.

Reviewed by Stephanie Decker

The Dutch East India company may be among the best researched businesses of all time, but it is testament to its importance as a proto-multinational and the quality of its archive that research on this firm continues to inform contemporary research debates. The working paper by Gelderblom, De Jong & Jonker (NEP-HIS 2014-01-17), which has since been published in the Journal of Economic History, is interesting as it deals with the early years of the VOC (Vereenigde Oostindische Compagnie), and presents both a historical narrative as well as some distinctive challenges to previous assumptions. Their paper has to be seen as both an interesting contribution to other researches on the VOC, as well as some more general debates.

The continued interest in this very old company is due to a variety of reasons. Even a short sweep of recent work that relates to the VOC shows a remarkable breadth of themes. Wim van Lent has compared management policies of the VOC with its competitor, the English East India company, to understand some problems of its organizational evolution (Sgourev & Van Lent, 2011). This comparison is so intriguing not just because of the Dutch-English colonial competition during this time period, but also because the two East India companies were organized very differently, and almost provide a naturally occurring counterfactual for each other in a laboratory that tests organizational effectiveness at long distance.

As both firms date back to the seventeenth century, and were among the first well-documented examples of how organizations dealt with the challenges of managing across vast distances, their corporate histories are of great importance in and of themselves. Both provide organizational solutions to some of the perennial problems of multinationals, which struggled with poor communication and oversight of operations, especially the difficulties of enforcing control and monitoring the trustworthiness of its agents.

test

Gelderblom et al. discuss the attitudes and conflicts within the Dutch Republic over the control of the VOC, the world’s first modern corporation

But despite all of these similarities to the multinationals of later stages, the East India companies were also fundamental different, and creations of their own time. The companies, especially the VOC, often took on roles that made them quasi-governmental bodies. As a result, they were involved in some of the day-to-day issues of governance of empire, which made these archives particularly rich. Thus they have been researched beyond the narrow confines of business history, and the particular insights that can be gained from those files have been discussed in great detail by Ann Laura Stoler (2009), a well-known postcolonial historian of gender and empire. The conduct of business often involved the company in political and personal issues well beyond what one would usually expect to see in a business archive, which offers rich contextual insights into the time period and its attitudes.

It is in this regard that the paper by Gelderblom et al. is interesting, as it discusses the attitudes and conflicts within the Netherlands over the control and financing of the VOC, and the exact rights and obligations of its directors. The paper takes core historical values such as contextualization and contingency (O’Sullivan & Graham, 2010) seriously, and paints a rich picture of the time period and some of the characters that influenced the decision-making within and beyond the VOC. The importance of these issues lies in more conceptual debates about the evolution of limited liability in the West (as opposed to other commercially vibrant areas such as the Middle East). Gelderblom et al.’s analytically structured narrative (Rowlinson, Hassard & Decker, 2014) highlights that although the VOC possessed some important legal features that we commonly associate with modern corporations, others developed only during its first years of operations in response to external pressures.
Consequently, having acquired two key features of the modern corporation (the split between ownership and management and transferable shares) from the outset, the VOC obtained three more (a permanent capital, limited liability for directors and by extension legal personhood) step-by-step over a period of some twenty years. Thus the five features did not come as a package, as a coherent logical set.

Their narrative shows how most of these pressures reflected financial constraints, as the large-scale trading activities in conjunction with military expeditions were a far larger undertaking than anything that had hitherto been financed on the Amsterdam money markets. This is an important contribution, and their short discussion in the conclusion quite sensitively highlights that some assumptions about the superiority of the Western institutional frameworks, such as argued for by Kuran (2010), are perhaps too ethnocentric to fully understand not just the different evolution of institutions in other cultures, but can also blind researchers to the historically contingent development of the legal frameworks that we now take for granted.

test

Gelderblom et al. hide much of their contribution in their paper’s appendix

In light of the above, it is noticeable that the actual narrative takes up the largest part of the paper, and that it is only at particularly important junctures that the historiographical literature is challenged, while the framing in the introduction and conclusion is more heavily conceptual. These insights that can only be developed from a careful, in-depth historical investigation perhaps deserve better highlighting. This extends to the title, which does not quite do justice to the large themes that inform the historical narrative. Finally, it is only in the appendix that it becomes clear for readers not familiar with the nature of the VOC archive that this early period that the paper deals with is indeed not as well-researched as the later period, especially in terms of its financial performance. All of this adds up to another interesting angle of research on the VOC, which as a company and an organizational archive is clearly a case of great importance for the history of business and its institutional developments.

References:

  • Kuran, T. 2010. The Long Divergence: How Islamic Law Held Back the Middle East. Princeton: Princeton University Press.
  • O’Sullivan, M., & Graham, M. B. W. 2010. Guest Editors’ introduction: Moving Forward by Looking Backward: Business History and Management Studies. Journal of Management Studies, forthcoming.
  • Rowlinson, M., Hassard, J., & Decker, S. 2014. Research Strategies for Organizational History: A Dialogue between Historical Theory and Organization Theory. Academy of Management Review, 39(3).
  • Sgourev, S. V., & van Lent, W. 2011. The Right Amount of Wrong? Private Trade and Public Interest at the VOC European Group of Organization Studies. Gothenburg, Sweden.
  • Stoler, A. L. 2009. Along the Archival Grain: Epistemic Anxieties and Colonial Common Sense. Princeton: Princeton University Press.

Models of Safe Banking? The European Savings and Cooperative Banks

Savings banks and cooperative banks in Europe

By: Dilek Bülbül, Reinhard H. Schmidt and Ulrich Schüwer (all at Goethe University Frankfurt am Main)

Abstract: Until about 25 years ago, almost all European countries had a so-called three pillar banking system comprising private banks, (public) savings banks and (mutual) cooperative banks. Since that time, several European countries have implemented far-reaching changes in their banking systems, which have more than anything else affected the two pillars of the savings and cooperative banks. The article describes the most important changes in Germany, Austria, France, Italy and Spain and characterizes the former and the current roles of savings banks and cooperative banks in these countries. A particular focus is placed on the German case, which is almost unique in so far as the German savings banks and cooperative banks have maintained most of their traditional features. The article concludes with a plea for diversity of institutional forms of banks and argues that it is important to safeguard the strengths of those types of banks that do not conform to the model of a large shareholder-oriented commercial bank.

URL: http://econpapers.repec.org/paper/zbwsafewh/5.htm

Review by Anthony Gandy

In recent years I have had the pleasure of teaching banking strategy and banking regulation to professional bankers, the vast majority from the Anglo-Saxon sphere. This is a real challenge, they have greater experience of retail, business and corporate banking than I will ever obtain. However, one thing I do know is that they struggle to cope with the concept that the listed, publicly traded, universal bank is not the only institutional model in town. It is of course not the dominant model in many countries. There are real rivals many different backgrounds that challenge the listed banks and have many strengths; to a large degree these strengths maybe due to the restrictions placed upon them.

Summary

The paper Bülbül, Schmidt and Schüwer is a White Paper (No. 5) on Policy from the Center of Excellence SAFE – Sustainable Architecture for Finance in Europe (Goethe University Frankfurt) and was distributed by NEP-HIS on 2014-01-17. It outline the characteristics of savings banks (those with a public ownership foundation, even if that is no longer the whole case) and cooperative banks across Europe and detail the history of these two institutional forms in German, Austria, France, Spain and Italy. Clearly the primary example is Germany where the three-tier banking structure is live and well (if we exclude a few issues!). In Germany there is a co-existence of public savings banks, cooperative banks and private banks. In other regimes the model has changed, but in the case of say France, the cooperatives are incredibly strong even if some of the localism of these institutions has now been lost.

The authors define seven features of savings banks; however, through the passage of reform (some they argue may have been misguided) only the first two are now common across the markets they have reviewed:

  1. A focus on savings and savings mobilization
  2. A clear regional and even local focus
  3. They were/are “public” banks owned or sponsored by a public body in a specific region or locality, and those authorities had/have “obligations” in respect of these local institutions
  4. They are organised under a “public” law, though the authors do not really define this
  5. They were expected to support the local economy and the local people and financially sustainable enterprises
  6. They were expected to adhere to the region or locality of the sponsoring public body – thus avoiding competition between such banks
  7. Maybe most importantly they were part of a “dense and closely cooperating networks of legally independent institutions that constitute a special banking group”

While, to all intense and purposes the seven criteria still hold good in Germany for savings banks, elsewhere it now tends to be just the cooperative banks which maintain the sense of locality, network and non-competition between local and regional players. Even here though, many cooperatives look and act like major national banking groups, some are even competitors in the investment banking markets.

The authors review the two hundred year history of the German savings and cooperative banks, and that of other nations. Though, of course, this is done very swiftly given the space limitations they have. They also try to illustrate how changes in the system has led to weaknesses in some industries which have moved away from the German model. As is outlined in the discussion below, the end of cooperation and coordination of between savings banks in Spain, where local savings banks did not compete in other regions, has had enormous consequences.

While the history is brief, it is informative. I for one was not aware that Raiffeisenbank was named in honour of Friedrich Wilhelm Raiffeisen who in the 19th Century established the concept of rural cooperative banks networked to centralised services organisations. The name is also common to Austrian cooperative banks and is the foundation of the movement elsewhere. I feel I should have known this. The history, especially in recent years is also important in showing why Germany has performed differently in this sector than other countries which ostensibly had similar three-tier frameworks in the past.

In the other country reviews, the focus is more on the last twenty five years. In France for example the cooperative banks have come to dominate much domestic and even international banking. They absorbed the smaller French public savings institutions (through the mergers which resulted in Banque Populaire Caisse d’Epargne (BPCE)) while Crédit Mutuel (CM) and incendie-du-credit-lyonnais[1]Crédit Agricole (Credit A) have acquired a number of private banking groups building corporate and investment franchises. Of course the ultimate expression of this was Credit A’s acquisition of, how shall we put it, the accident prone Crédit Lyonnais giving it stake in corporate and international banking in France.

The author conclude by reviewing (as they do also in the country reviews, especially in the German one) past and current literature on whether public savings banks and cooperatives are inefficient, not incentivised to be competitive or even whether they carry higher risk. Their conclusion is that older research which support these points have now been supplanted by newer research which invalidates these arguments, especially in the light of recent events.

Discussion

One could argue that the case they make in their paper that German local public savings banks did not suffer to any large degree in the financial crisis could be countered by two points. Firstly, while the local savings banks had little exposure to securitised markets or to southern European debt, the structure of their industry would not really allow this anyway. These banks are local, however, they also provide funds to the Landesbanken which act as the central services and, effectively, the centralised treasury. It is they which then use funds to access corporate, investment and international markets. As the authors have point out, the Landesbanken have been hard hit in the financial crisis. Effectively the savings bank and the cooperative banking sector disaggregate the banking activity network into those which take in deposits and fund local projects and those which play a centralised role supporting the local institutions with an infrastructure and acting as their representatives in international wholesale markets. So they do not make perfect comparators to the more integrated large commercial banks. Secondly, while German has suffered from exploring the deposits of its savings banks and other banks abroad to fund various assets, the local German economy has not suffered, so the savings and cooperative banks have not been tested at local level, not this time around anyway.cartoon120621_2_full_600x400[1]

Secondly, the Italian section is a maybe little brusque. While savings banks and cooperatives along the German model have existed since the late 19th century, it is stated that they have not really established themselves to such a large extent and have been privatised. However, some of the arguments put forward for the benefits of public savings and cooperative banks are that they maintain localism. While Italy has clearly done much to privatise and get local politics out of their banks, they still certainly maintain more local banks than say a UK or Ireland as a proportion of their banking industry. In addition, while the word “Foundations” is mentioned iceberg-montepaschi[1]once, we rather skip over the important role they play in the governance and ownership of certain Italian banks in which the Foundations play such a large role and which still own a large proportion of the bank, including and rather notably the oldest of them all, Banca Monte dei Paschi di Siena, which so obviously faces an existential crisis.

Policy and Teaching

The public savings industry which the authors really find was badly hit by financial crisis was the Spanish one. However, they make a very interesting point that the industry in Spain had already abandoned many of the seven characteristics of public savings banks the authors identified. Indeed they make the very strong case that by allowing the savings banks in Spain to become national and to expand in areas they had little experience, they were attracted to the booming area of commercial mortgages, the vast majority used to fund the property bubble which would so damage Spain when it burst.

This last point is an interesting one as it shows the consequences of changing a system of ownership and governance under pressure to reform for only one reason, in this case the European standardised view of competition. Given banks are at the heart of the monetary system, consequences elsewhere in the economy have to be considered. Until the 1970s the Spanish savings banks were public institutions and somewhat politicised. Accession to the EU in 1986 brought pressure to reform and to liberalise, and yet while elements of competition were reformed, the governance of these institutions was not improved; fiefdoms remained, spurred on by growing competition. Of course the EU is hardly to blame for house price falls of up to 53.5% in Spain, but it does emphasise the importance of working through the long term consequences of policy changes which may interact with other events.

This paper not only gives teaching staff the opportunity to expose students to other banking governance and ownership possibilities, it discusses how changes to the model once common to all public savings and cooperative banks have potentially undermined some of their advantages and led to unintended consequences. It will be in the student reading list next year for sure.

Must we question corporate rule?

Financialization of the U.S. corporation: what has been lost, and how it can be regained

William Lazonick (University of Massachusetts-Lowell)

Abstract
The employment problems that the United States now faces are largely structural. The structural problem is not, however, as many economists have argued, a labor-market mismatch between the skills that prospective employers want and the skills that potential workers have. Rather the employment problem is rooted in changes in the ways that U.S. corporations employ workers as a result of “rationalization”, “marketization”, and “globalization”. From the early 1980s rationalization, characterized by plant closings, eliminated the jobs of unionized blue-collar workers. From the early 1990s marketization, characterized by the end of a career with one company as an employment norm, placed the job security of middle-aged and older white-collar workers in jeopardy. From the early 2000s globalization, characterized by the movement of employment offshore, left all members of the U.S. labor force, even those with advanced educational credentials and substantial work experience, vulnerable to displacement. Nevertheless, the disappearance of these existing middle-class jobs does not explain why, in a world of technological change, U.S. business corporations have failed to use their substantial profits to invest in new rounds of innovation that can create enough new high value-added jobs to replace those that have been lost. I attribute that organizational failure to the financialization of the U.S. corporation. The most obvious manifestation of financialization is the phenomenon of the stock buyback, with which major U.S. corporations seek to manipulate the market prices of their own shares. For the decade 2001-2010 the companies in the S&P 500 Index expended about $3 trillion on stock repurchases. The prime motivation for stock buybacks is the stock-based pay of the corporate executives who make these allocation decisions. The justification for stock buybacks is the erroneous ideology, inherited from the conventional theory of the market economy, that, for superior economic performance, companies should be run to “maximize shareholder value”. In this essay I summarize the damage that this ideology is doing to the U.S. economy, and I lay out a policy agenda for restoring equitable and stable economic growth.

URL http://econpapers.repec.org/paper/pramprapa/42307.htm.

Review by Bernardo Bátiz-Lazo

As I have noted before (see Bátiz-Lazo and Reese, 2010), financialisation has been coined to encompass greater involvement of countries, business and people with financial markets and in particular increasing levels of debt (i.e. leverage). For instance, Manning (2000) has used the term to describe micro-phenomena such as the growth of personal leverage amongst US consumers.

In their path breaking study, Froud et al. (2006) use the term to describe how large, non-financial, multinational organisations come to rely on financial services rather than their core business for sustained profitability. They document a pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production.

Instead, in the preface to his edited book, Epstein (2005) notes the use of the term as the ascendancy of “shareholder value” as a mode of corporate governance; or the growing dominance of capital market financial systems over bank-based financial systems.

Alternative view is offered by American writer and commentator Kevin Phillips, who coined a sociological and political interpretation of financialisation as “a process whereby financial services, broadly construed, take over the dominant economic, cultural, and political role in a national economy.” (Phillips 2006, 268). The rather narrow point I am making here and which I fail to elaborate for space concerns, is that ascertaining the essential nature of financialisation is highly contested and is in need of attention.

Sidestepping conceptual issues (and indeed ignoring a large number of contributors to the area), in this paper William Lazonick adopts a view of financialization cum corporate governance and offers broad-base arguments (many based on his own previous research) to explore a relatively recent phenomenon: the demise of the middle class in the US in the late 20th century. In this sense, the abstract is spot on and the paper “does what it says on the can”. Yet purist would consider this too recent to be history. Indeed, the paper was distributed by nep-hme (heterodox microeconomics) on 2012-11-11 rather than NEP-HIS. This out of neglect rather than design but goes on to show that the keywords and abstract were initially not on my radar.

William Lazonick

Others may find easy to poke the broad-stroke arguments that support Lazonick’s argument. Yet the article was honoured with the 2010 Henrietta Larson Article Award for the best paper in the Business History Review and was part of a conference organised by Lazonick at the Ford Foundation in New York City on December 6-7, 2012 (see program at the Financial Institutions for Innovation and Development website).

Lazonick points to the erotion of middle class jobs in a period of rapid technological change. This at a time when others question whether the rate of innovation can continue (see for instance The great innovation debate). Lazonick implicitly considers our age as the most innovative ever. But his argument is that the way in which the latest wave of innovation was financed is at the hear of the accompanying ever-growing economic inequality.

So for all its short comings, Lazonick offers a though provoking paper. One that challenges business historians to link with discussions elsewhere and in particular corporate governance, political economy and the sociology of finance. It can, potentially, launch a more critical stream of literature in business history.

References

Bátiz-Lazo, B. and Reese, C. (2010) ‘Is the future of the ATM past?’ in Alexandros-Andreas Kyrtsis (ed.) Financial Markets and Organizational Technologies: System Architectures, Practices and Risks in the Era of Deregulation, Basignstoke: Palgrave-Macmillan, pp. 137-65.

Epstein, G. A. (2005). Financialization and The World Economy. Cheltenham, Edward Elgar Publishing.

Froud, J., S. Johal, A. Leaver and K. Williams (2006). Financialization and Strategy: Narrative and Numbers. London, Routledge.

Manning, R. D. (2000). Credit Card Nation. New York, Basic Books.

Phillips, K. (2006). American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century. London, Penguin.

Political Power and Regional Economic Performance

Who is the boss here? Regional power and participation of the Caribbean coast in the ministerial cabinets, 1900-2000.
(Original title: ¿Quién manda aquí? Poder regional y participación de la costa Caribe en los gabinetes ministeriales, 1900-2000)

by Adolfo Meisel Roca (ameisero@banrep.gov.co)

URL: http://econpapers.repec.org/paper/col000101/009424.htm

Abstract (Translated from Spanish by the reviewer)

It is well known that regional identities are very strong in Colombia and that they have had an influence in the politics of the country. One of the dimensions that Presidents of the Republic take into account for the composition of their cabinet is regional origin. In this paper we analyse the regional origins of Colombian ministers at cabinet level during the twentieth century. This to identify whether particular regions dominate the number of ministers in the cabinet and whether individuals from a particular region were overwhelmingly appointed to a specific ministry. To analyze the regional participation in the cabinet, we constructed a database with the names of the 702 persons that served as ministers during the twentieth century. The paper focuses on the Caribeann region, because we wanted to study its participation in the national political scene, during a century in which its economy lagged behind in comparison to the central region of the country. However, to articulate a comparative regional perspective, we have also widely discussed the cases of Antioquia and Bogotá and, to a lesser extent, of other regions of the country. The results show the strong influence of Antioquia and the departments of the coffee-growing region on the cabinets of the first part of the twentieth century, as well as the rise of Bogotá in the last decades of the century.

Review by Sebastián Fleitas

This paper was distributed by NEP-HIS on 2012-04-17. It addresses the role of the Caribbean region in the executive branch of the Colombian government, given that it was a region that fell behind in terms of economic development, human capital and political power throughout the twentieth century. The regional inequality in Colombia is well-know. It is an issue of economic and political policies to the extent that each president of Colombia has had to take into account while aiming for a balanced regional composition of his cabinet. To describe and interpret the links between political power and economic development at the regional level, Adolfo Meisel constructs a database with the information about regional origin for all the 702 persons that were ministers during the twentieth century in Colombia.

Colombian Regions (number two is Caribbean Region)

Colombian Regions (number two is Caribbean Region)

I think that this paper makes two important contributions. The first one is that the article describes in a very precise way that the Caribbean region had a low participation in the executive branch during the twentieth century and that in fact this low participation contrasts with the increased influence of the capital city (Bogotá) and the coffee-growing region. This trends can be seen in the fact that no president was born in the Caribbean region; in the participation of the Caribbean region in the total number of ministers during the century (about 12%); and also in the fact that the participation of ministers born in the Caribbean region in key areas (like the Treasury, Trade, Defense, Education or Economic Development) was lower than than the average participation of individuals from other regions. Meisel also advances some possible explanations regading the change in regional political power in Colombia: the backwardness of the Caribbean region, the rise of the coffee-growing region and the consolidation of Bogotá as the most important economic center.

Second, this paper addresses the important issue of political power and economic development, making focus in the regional dimension in a country with strong regional inequalities. The literature on the linkages between political power and economic development has a long tradition. More recently it has had a big impulse with the work of Acemoglu and some of his co-authors (see Acemoglu, et. al., 2005, the recent book by Acemoglu and Robinson´s Why Nations Fail as well as Anna Missiaia’s entry to NEP-HIS entitled Acemoglu on Past, Present, Future and Beyond). However, similar efforts to understand the institutional factors and the role of political power in economic development in Latin America are few and far apart (such as the work of Roderic A. Camp for Mexico). This issue is of great importance in Latin America due to the persistence of institutions that have been blamed of deterring economic development. Moreover, Latin America exhibits significant levels of inequality that could lead to worse economic performance if the elites use their political power to perpetuate themselves using these extracting institutions.

Cartagena de Indias (The most famous Caribbean region city)

There are, however, two major concerns that limit the scope of the contributions in this paper and in particular, regarding the linkages proposed between regional political power and economic development. The first one relates to the fact that the author uses the place where the minister was born in order to assess the regional origin, which in turn is used to assess the political power of the regions during the twentieth century.

It is not straightforward that the origin of the minister is a good indicator of the political power of a region and even more that this type of political power could be transformed into a better economic performance of that region. At least two reasons can be argued. First, the region where the minister was born might not be a good indicator of his commitment with that region, either because this commitment is not strong before being elected or because after being elected his preferences can change. For instance, whether President Obama was born in Kenya or Hawaii is somewhat besides the point as he took office as Senator from Illinois.

As a cabinet minister rather than an elected official, a politician might wish to maximize, among other things, their continuity in the Executive branch, which depends more on the President’s decisions than on the regional support for a particular individual. On the other hand, there is not a direct relationship between this kind of political power and the economic performance of a region, because even when if a minister wants to favor a region, policies enter in a political process in which the other ministers take part, and also a complex process of negotiation in the legislative branch (were possible lobbyists can take action). For these reasons, I think that the paper would benefit if the author discussed a little bit more the relationship between the executive and legislative branch, the role of regional lobbyists and the existence of regional development policies, in order to try to isolate the effect of the regional composition of the cabinet on the performance of the Caribbean region.

Casa de Nariño (Colombian Government House)

A second important issue that Meisel could address is the existence of endogeneity between political power and economic development. It is key to address this endogeneity in order to make conclusions and to determine the causality in the relationship. An example may help to make this point more clear. Assume that a region that has better performance over time due to different commodity endowments and invests some of the proceeds to improve its educational system. Assume that eventually the more educated people serve in the cabinet. In this example, the composition of the cabinet will show that people from more developed regions have a greater participation in cabinet, but note that the causality goes from a better performance to increased participation.

But the things can be the other way around. Assume now that exogenously a president born in the central region decides to appoint only ministers from his region for the Cabinet. Assume also that these people decide to allocate the resources for education in a very unequal way, favoring this region. Assume that eventually by this process the people from this region get more educated than the people from other regions and that this increase in human capital boosts economic growth. Under the assumption that the more educated people have better opportunities to be in the Cabinet, then the data will again show that people from more developed regions have a greater participation in cabinet, but note that this time the causality goes from the political power to economic development.

These two very simplified examples predict the result that the author finds for the composition of the Colombian Cabinet during the twentieth century. However, the reasons for this are very different in each example. In the first example economic development generates political power while in the second political power causes a better economic performance. Overall, I find that the discussion of the linkages between political power and economic development are really important to economic development. This is particularly true for Latin American countries, where the existence of a huge inequality could be seen as a hint of the presence of an economic elite that reproduces its privileges over time. However, in order to advance in the understanding of the linkage between political power and economic development, the big challenge is to find exogenous shocks that allow to draw conclusions about the direction of the causality.

How did the antipope affect the distance to school?

Medieval Universities, Legal Institutions, and the Commercial Revolution

By Davide Cantoni (cantoni@lmu.de) and Noam Yuchtman (yuchtman@haas.berkeley.edu)

URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:17979&r=his

Abstract:

We present new data documenting medieval Europe’s “Commercial Revolution” using information on the establishment of markets in Germany. We use these data to test whether medieval universities played a causal role in expanding economic activity, examining the foundation of Germany’s first universities after 1386 following the Papal Schism. We find that the trend rate of market establishment breaks upward in 1386 and that this break is greatest where the distance to a university shrank most. There is no differential pre-1386 trend associated with the reduction in distance to a university, and there is no break in trend in 1386 where university proximity did not change. These results are not affected by excluding cities close to universities or cities belonging to territories that included universities. Universities provided training in newly-rediscovered Roman and Canon law; students with legal training served in positions that reduced the uncertainty of trade in medieval Europe. We argue that training in the law, and the consequent development of legal and administrative institutions, was an important channel linking universities and greater economic activity.

Review by Chris Colvin

The “distance to” literature, as I like to call it, has just had an exciting new addition, from Davide Cantoni (University of Munich) and Noam Yuchtman (Haas School of Business, UC Berkeley). As UK readers will know all too well, our tabloid press is quite obsessed with stories about the distance to school (sometimes even more than house prices). In their new working paper (circulated by NEP-HIS on 2012-04-17), Cantoni and Yuchtman apply this English obsession to explain something altogether different; they use the distance to new post-Schism universities as an indicator of human capital in what may well be a 14th-century natural experiment.

Recent contributions to the “distance to” literature include Sascha Becker and Ludger Woessmann’s 2009 QJE article, which uses distance to Wittenberg as an instrument for Protestantism, Jeremiah Dittmar’s 2011 QJE article, which uses distance to Mainz as an instrument for the adoption of the printing press, and, in an interesting combination of the two, Jared Rubin’s working paper, which uses distance from Mainz as an instrument for the spread of Protestantism through the printing press.

Whilst these all focussed on questions involving the 16th-century Reformation, Cantoni and Yuchtman look at a much earlier Christian division: the 14th-century Papal, or Western, Schism that led to the Avignon-based Antipopes. Europe’s German areas had no universities before this schism. German states largely chose to follow the Roman pope, as a result of which German academics and students could no longer get to school; German academics found themselves in the antipope’s realms and were exiled. Returning home, they establish their own schools in places like Erfust, Heidelberg and Cologne.

Antipope Clement VII: Cantoni and Yuchtman think he may have helped cause the Rise of the West

Cantoni and Yuchtman argue that this influx-of-the-educated led to a proliferation of legal education, which in turn facilitated economic exchange and helped lead to the Commercial Revolution and the Rise of the West. Their core “distance to” instrument for education is defined as the change in distance between a market and its closest university following the establishment of a new German university. Markets in the west of the German parts of the Holy Roman Empire saw a larger reduction in this distance-to-school measure than in the east, and the interaction of the timing of universities’ arrival and this change in distance correlates nicely with the founding of organised markets.

As with all papers involving natural experiments of history, the authors devote considerable time convincing readers that the arrival of new universities was truly an exogenous event, that these universities would not have been established were it not for the Papal Schism. One of the ways they do this is with “placebo regressions” involving parts of Europe affected by the Schism, but which saw no change in the trend in university establishment, such as England. However, by their own admission, the most important part of English legal education at the time took place in London, at the Inns of Court, rather than at Oxbridge, which were basically glorified seminaries for the rich; perhaps they could consider the Inns as a de facto university in their next version of the paper. Another placebo regression I would like to see would involve ancient universities (like Northampton, Lucca and Würzburg) that were short-lived: do their results still hold if these failed universities are included?

Unfortunately, Cantoni and Yuchtman decided to distribute their working paper using the NBER, which means it is behind the Great Academic Firewall; only individuals clicking on the paper from within a university network can download it for free. Fortunately, Yuchtman has also uploaded a copy on his personal webpage. I think it is high time for the NBER to stop charging punters to access its papers; members should vote with their feet and distribute their work-in-progress in alternative ways!

Latin American Economic History: new questions, new data, old problems

Intraregional trade in South America, 1913-50. Economic linkages before institutional agreements

by José Peres Cajías, Marc Badia-Miró (mbadia@ub.edu) and Anna Carreras-Marín (annacarrerasmarin@ub.edu) (Universidad de Barcelona)

URL: http://econpapers.repec.org/paper/barbedcje/2012270.htm

Abstract

With the exception of the North American Free Trade Agreement (NAFTA), trade integration is still modest in Latin America, at around 20% of total trade. Surprisingly, these levels were higher in 1945, when the figure for imports stood at 25.6%. Paradoxically, this result shows that trade integration reached its peak before trade integration agreements were signed. To understand the reasons for this, we examine intraregional trade throughout the interwar period (1913-1950). We analyze five national cases: Argentina, Bolivia, Brazil, Chile and Peru. As far as we know, this is the first paper in the literature on intraregional trade during the interwar period. There are other papers on intraregional trade in Latin America, but they focus on the period after the 1960s. The analysis of intraregional trade in the interwar period is also useful to the Latin American industrialization debate. Given the disruption in world trade flows and the existence of some industrial capacity, the paper looks at any possible increase in intra-industry trade. There are two main conclusions: a) with the exception of the World War periods, intraregional trade has been low since 1913; b) in general, intraregional trade reflects the overall trade specialization: there is a high concentration of low value added products.

Review by Sebastián Fleitas

This paper was distributed by NEP-HIS on February 20, 2012 and deals with the fact that in spite of the many trade agreements that have been signed since the 1990s, actual international trade between Latin American Countries (LACs) remains quite low. The authors tell us that low trading volume is not at all new. This by looking at intraregional trade between 1913 and 1950, They construct a new database to describe the intensity and characteristics of trade for five LACs: Argentina, Bolivia, Brazil, Chile and Peru.

Two main conclusions arise from their analysis. The first one is that trade among Latin American countries was low during the first half of the 20th Century, but similar to the current levels. Interestingly, intraregional trade only increased during the WWI and WWII. The second conclusion by Peres Cajías and colleagues is that the flow of goods and services in intraregional trade reflect the same pattern as the flows with countries outside the region, namely there is a high concentration of low value added products.

These results are very important in the context of the early industrialization and the state-led industrialization process that was typical of LACs in the early 20th Century. Intraregional trade provides an opportunity to develop new goods, to attempt technological catch up under better conditions and to export to extra-regional markets. This process allows countries to make the structural change that is the basis for any process of economic development. In this sense, the failure to develop a dense network of intraregional trade could explain some of the difficulties to implement structural transformations and to find a more successful international trade pattern.

Upside-down Map, Joaquín Torres García (1943)

Even when this working paper describes in a very clear way the stylized facts, I think that there are two issues to improve that would contribute to a better understanding of the problem addressed. The first issue is that, in order to see what are the characteristics of the intraregional trade, the authors could compare the data with that of the trade with extra regional countries. A deeper and more formal comparison between these flows for each country can allow us to answer very important questions, for example if these flows were attempts to develop new goods that were frustrated when the developed countries came back to the international markets or if they simply were desperate attempts to increase exports when the international markets were closed. These two scenarios lead to totally different inferences about the role and the performance of the intraregional trade.

The second issue is that, even when the paper describes the findings in a very clear way, it is really important to go one step forward and try to see what factors are determining the intraregional trade flows. During the 20th Century LACs suffered many strong international shocks, followed very different policies and tried to implement a variety of institutional agreements of trade. In this context it is important to have a theoretical framework that provides clear interpretations over periods and countries. Such a theoretical framework would answer why and when we should expect higher levels of intraregional trade. Also, what is the role of some specific factors in the intraregional trade: endowments, (low) levels of productivity, the excessive volatility in macroeconomics variables or the balance of payments constrained growth (Bértola and Ocampo, 2010); what these low amounts of intraregional trade tell us about these factors or about the whole variety of trade agreements that the countries tried to implement over the 20th Century.

Finally, it is important to remark that one very important contribution to this working paper is to construct a new database based on LACs’ sources. As the authors state, the construction of databases of international trade has frequently relied on the use of official sources from developed countries (especially the United States, the United Kingdom and Germany, for example for reliability issues Federico and Tena, 1991). However, some key problems of the development of LACs can only be addressed using Latin American data and a methodology that assures their reliability, even when the sources have different problems as in many


The Economies of Latin America:
New Cliometric Data
César Yáñez and Albert Carreras (Editors)

periphery countries. The task of understanding the process of development in Latin America by the use of new databases is a joint effort of scholars from LAC, Europe and other regions. A privileged example of that is the collective work “The Economies of Latin America: New Cliometric Data”, edited by Carreras and Yañez, which has been released in these days and in which the authors of this paper participate. The volume contains twelve very interesting chapters showing new evidence and their interpretation about key issues from LACs’ Economic History. This new contribution, together with the Montevideo-Oxford Latin American Economic History Database (MOXLAD) among others, makes new data available to better understand old problems but to try to come up with new and better answers.