Week of April 11, 2021
Spanish Malaise, East Asian Miracles, and a Regulatory Mire
After a lengthy hiatus, we’re back to regularly scheduled programming. We look at two perspectives on the economic misfortunes of Spain during the seventeenth century; examine the causes and political economy consequences of East Asian statism; and dissect the antecedents of India’s striking protectionism during the late twentieth century.
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The rise and fall of Spain (1270-1850)
Carlos Alvarez-Nogal and Leandro Prados de la Escosura | Economic History Review | 2013
Due to a paucity of production data, quantitative studies on the long-run economic fortunes of Spain have been few and far between. Alvarez-Nogal and Prados de la Escosura seek to circumvent this problem, building a time-series for output per capita from the end of the thirteenth century to the middle of the nineteenth using data on wages, agricultural prices, and urbanization. To measure agricultural output per capita, they estimate real incomes (using a combination of real wages and rents) and the elasticities of staple crops to fill out a consumption function based on Allen’s demand-based approach. This is multiplied—under the assumption that production equals consumption—by the population to get a measure of aggregate output. They then construct yearly weights for the agricultural and non-agricultural shares of the economy (the latter proxied by urbanization) to produce GDP per capita as an average of the two. The results, pictured below, show two distinct phases in Spanish economic history: an initial period of growth from 1270 to 1590, interrupted by the sharp (1/4 of output) decline resulting from the Black Death, and a later period of stagnation. The fall in output is attributed to the Dutch Disease-related loss of export competitiveness, which led to the ruin of the famed wool industry, and excessive taxation of urban areas. The authors conclude by stressing, by contrast with traditional Malthusian models, that population growth and output per capita advances were correlated—suggesting that Spain, as a high land-labor ratio frontier economy, was not experiencing the demographic pressures prevalent across Europe. Thus mortality shocks served to disrupt economic connections and isolate already-scarce settlements, reducing the nation’s ability to maintain previous levels of production.
The Origins of Import Substituting Industrialization in India
Tirthankar Roy | Economic History of Developing Regions | March 2017
By the time of India’s liberalization reforms in the early 1990s, the subcontinent boasted some of the world’s highest universal tariffs, averaging over 100 percent. This regime emerged after the country’s independence in 1947, following an era of first free trade and then limited protection under British colonial rule. Roy, combatting a standard nationalist narrative labeling Indian ISI—a productivity disaster—a failure of design, argues that the policy was also the result of poor intentions. Where the imperial government had sought to select firms on efficiency criteria, in the hope that these enterprises could overcome barriers and become competitive, the newly independent Indian government moved inexorably toward indiscriminate protection. Contrary to popular histories, the British system was not—after reforms—merely designed to reinforce preference for the metropole; rather, the proceedings of the Tariff Board, Stores Purchase committee, and Fiscal Commission show exclusively microeconomic concerns. To Indian nationalists and businessmen hoping to nurture indigenous industry (even at significant welfare costs), this program was unsatisfactory, and political pressure mounted against discriminate protection throughout the 1930s. These arguments suppressed many of the technical economic problems with which the early tariff authorities were concerned, particularly India’s colossal productivity deficit across a wide range of industries—Tata Steel, the country’s premier ironmaker, produced only 5 tons per worker from 1914 to 1922, while American equivalents put out 53 tons.1 Roy concludes that the “indiscriminate protection” regime merely served to enrich a small cadre of business interests at the expense of the mass of smaller producing and trading enterprises that flourished under the open economy.
The Decline of Spanish Industry and the Price Revolution: A Neoclassical Analysis
Peter J. Forsyth and Stephen J. Nicholas | Journal of European Economic History | 1983
Why did Spain, Europe’s (and perhaps the world’s) premier imperial power in 1600, suffer a century of decline during the disastrous seventeenth century? The question was debated by contemporary scholars, the so-called arbitristas2, who blamed treasure-induced inflation, elite venality, and the financial costs of the country’s unending wars for the ruin of domestic industry. Earl J. Hamilton, in his influential volume American Treasure and the Price Revolution in Spain, 1501-1650, proposed what became the standard interpretation, based on the quantity theory of money: the injection of silver hauled out of the depths of Potosi meant that “too much money [was] chasing too few goods,” leading to rampant inflation and rendering Spanish exports uncompetitive. Forsyth and Nicholas propose an alternate interpretation, influenced by the growing literature and empirical evidence on Dutch Disease.3 They suggest that domestic consumers cannot use the whole of a resource windfall, so that some of the bounty—in this case, silver—must be exported, and tradable goods purchased in return. Moreover, the increased income derived from the booming sector will result in increased spending on and higher prices in the non-traded sector, for which foreign substitutes are unavailable. This, in the case of Spain, led to resources being transferred out of tradable industry (raising prices, rendering these goods internationally and domestically uncompetitive) and into non-tradable production (typically land and services).4
[T]he structural changes in the Spanish economy, which required the decline of industry, was [sic] a necessary consequence of the American mineral discoveries. Inflation was simply one mechanism through which the structural changes necessitated by the gold and silver discoveries was effected. Once the natural resource was discovered, the only way in which the resource. could be converted into consumption was through trade and an increase in the production of non-traded goods at the expense of a contraction of traded goods production.
Such a process would account for the symptoms of Spanish decline so vividly portrayed by Hamilton eight decades ago:
[T]he number of sheep in the flocks of the Mesta, or guild of migratory herders, diminished after 1560 and fell precipitately in the seventeenth century... In 1619 it was reported that the livestock in the bishopric of Salamanca had declined by 60 per cent since 1600, and in the same year the Council of Castile complained that villages were falling into ruins and fields becoming deserts… Francisco Martinez Mata noted the disappearance of numerous craft guilds, including workers in iron, steel, copper, tin, sulphur, and alum; and the once flourishing glove industry was almost dead. According to contemporary complaints, Burgos was in ruins, and Segovia was a desert. The number of woollen manufactures in Toledo declined about three-fourths in the first two-thirds of the seventeenth century; and the manufacture of arms, the one industry that should have flourished under the stimulus of perpetual wars, reached such a low ebb that the Cortes petitioned the Crown to import artisans to revive it.5
The ‘paradoxes’ of the successful state
Dani Rodrik | European Economic Review | 1997
If the political-economic pendulum (to borrow Rodrik’s phrase) had swung toward what John Williamson would dub the “Washington Consensus” in 1989, a strong movement in the opposite direction—of which Rodrik was both an observer and a part—was well underway by the time this insightful lecture was published in 1997. Using the now-mature East Asian countries as examples, Rodrik here attacks the view that liberalization, deregulation, and fiscal conservatism were driving forces behind the great growth successes of the twentieth century. He shows that neither South Korea nor Taiwan followed the traditional heuristics of economic policy (uniformity, transparency, and non-selectivity); rather, these countries industrialized behind massive programs of discretionary investment subsidies and public-private cooperation. South Korea offered credit through nationalized banks at negative real interest rates and backstopped firms in desired industries, while Taiwan handed out judicious tax rebates and used public enterprises to start new sectors. Countries that followed these simple rules in encouraging exports, such as Kenya and Bolivia, fared far worse, as many domestic firms either failed to collect offered subsidies or treated the cash as a windfall payment. Brazil, meanwhile, used micromanagement of subsidies and individual contracts with multinational firms to overcome decades of economic mismanagement and render auto exports a billion-dollar sector by the 1980s. Rodrik concludes that uniformity and “arms-length” bureaucracy ultimately dampen incentives and prevent close monitoring of performance, both of which were vital to his examples of export-led, investment-driven growth. The Brazilian case is perhaps somewhat of a weak point, as huge proportions—up to 50 percent—of export values had to be covered by subsidies,6 but overall this is an incisive analysis of the somewhat counterintuitive fundamentals of industrial policy.
See Clark (1987), Wolcott and Clark (1999), and Clark and Wolcott (2003) for further evidence and analysis.
Or arborists, as Grammarly would prefer.
See Corden and Neary (1982) and Corden (1984) for theoretical explanations, and Drelichman (2005a) for a modern examination of this issue applied to Spain.
Roberto Bonfatti, Adam Brzezinski, Eva Fernandez-Garcia, and Nuno Palma are currently working on a similar analysis; see their EHS blog post here.
Hamilton (1938), pp. 170-1.
This brings to mind the classic critique of the Soviet economic system—that it could achieve simple, medium- to long-range production goals, but only at the sacrifice of broader economic development. See Ericsson (1991), Allen (2001) for context (especially the former).