In economic history, the 'Little Divergence' refers to the divergence in income per capita between countries in Europe in the early modern period (that is, after the Middle Ages). [*] Over the period from 1300 C.E. to 1800 C.E., Holland and England overtook Spain, Italy, and Portugal in terms of income per capita. This is somewhat of a surprise, given that Spain and Portugal in particular had early access to wealth from the New World.
Past research such as this article by Daron Acemoglu, Simon Johnson (both MIT), and James Robinson (Harvard), published in the journal American Economic Review (ungated earlier version here) argues that by 1500 C.E., the political institutions differed between northern and southern Europe in such a way to drive this divergence. Specifically, they argue that Spain and Portugal had absolutist monarchies, while in England and Holland the monarchies were much more constrained. Absolutist monarchies are an example of an 'extractive institution' - an institution that excludes the majority of society from political and economic power. This contrasts with 'inclusive institutions', which incentivise the participation of all people in society. You can think of societies' institutions as existing along a continuum from extractive to inclusive, with England and Holland closer to inclusive, and Spain and Portugal closer to extractive.
However, a recent paper by Antonio Henriques (Universidade de Porto) and Nuno Palma (University of Manchester) challenges this simple narrative (see also the summary of the article here). Using a variety of datasets, Henriques and Palma show that institutions were no more extractive in Spain and Portugal than in England until well after the Little Divergence had already begun.
First, looking at the number of times that parliaments met in each of the countries, they find that:
...Portugal and Spain did not perform worse than England until the mid-seventeenth century.
Second, looking at depreciation of coinage over time (which would be an indicator of an extractive ruler), they find that:
During the sixteenth century, both England and the Dutch Republic perform significantly worse than Spain and Portugal according to this measure, and it is not until the seventeenth century that the Spainish [sic] monarchy started to perform badly.
Third, they look at real interest rates in the three countries (where higher real interest rates would be an indicator that lending to the government was seen as more risky, as would be expected in a society with extractive institutions), and find that:
England and the Netherlands were not paying lower rates than their Southern rivals until late in the early modern period.
None of this is consistent with the idea that differences in institutions by 1500 C.E. were drivers of the Little Divergence. Henriques and Palma conclude that:
Iberia's economic divergence was not a consequence of inferior initial institutions. At least prior to the civil wars of the mid seventeenth century, England did not have more constraints on executive power or an environment more protective of property rights than Spain or Portugal... At some point England did have better institutions, but that point occured [sic] considerably later than 1500. Accordingly, explanations for the little divergence among Atlantic traders which rely on variation in the quality of \initial institutions" (in particular, constraints on executive power by 1500 or earlier), such as that by Acemoglu et al. (2005), cannot be correct...
Modern economic and political institutions trace their origins back to the early modern period. A lot of economic research takes advantage of this 'path dependence'. However, this paper by Henriques and Palma demonstrates the limits of path dependence as an explanation. At some points, there are going to be contemporaneous factors that influence economic and political institutions as well, and if we are not careful, we can miss those important determinants of change.
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[*] In contrast, the 'Great Divergence' refers to the great growth in European income per capita, relative to income per capita in China and other Asian countries.
[HT: Marginal Revolution, last year]
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