In The Long Process of Development: Building Markets and States in Pre-industrial England, Spain and their Colonies, my co-author and I show that smugglers in New Spain (current Mexico plus much more) conducted virtually all trade with Europe in the 1600s, including much of the exportation of silver. In fact, it is estimated that in some decades over 50% of the silver sent to Europe was shipped illegally from Mexico. Because this trade was illegal, it didn’t bring about a growing system of laws, rules, & regulations enforceable in a judicial system.
As Douglass North wrote, it is important to have property rights that are internalized in people’s consciousness and unconsciousness, embodied in multi-volume codes of laws and regulations, and enforced by impartial courts and professional bureaucracies. That Mexico did not have because of its smugglers ’ economy.
In principle, the de facto legalization of trade between Mexican ports and the United States during the war with France should have been highly beneficial to the development of a commercial culture in Mexico. It was, in fact, advantageous, but the benefits were limited by the fact that Mexico had few ships on the East coast to use in trade with either the US or anyone else.
An excellent new working paper shows that perhaps illegal trading wasn’t so bad after all, even if it didn’t give rise to good institutions. Daphne Alvarez Villa and Jenny Guarded, in “The Long-Run Influence of Institutions Governing Trade: The Case of Colonial and Pirates’ Ports in Mexico,” show that:
“The presence of trade, either in its legal or illegal form, leads to significantly better development outcomes compared to neighboring areas where such activities were absent.”
They note that conventional wisdom would assume that “smuggling may be detrimental for long-run economic growth and development for numerous reasons: first, by fostering a culture of informality and illegality in detriment of revenue collection; second, the weaker presence of the state may make it difficult to enforce contracts and protect property rights thus depressing economic activity; and finally, colonial smuggling was at times accompanied by piracy and these ports were often subject to armed attacks and pillage, particularly during the 16th and 17th century.”
However, “smuggling during colonial times may have created the necessary conditions to benefit from trade liberalization in the late 18th century (comercio libre) and after independence (1821). For instance, merchants with the “know-how” and experience of clandestine networks had an advantage in the business once trade restrictions were lifted. Such an early start in commercial activities (either legal or illegal) may have compensated for the damaging effects of a weak state presence and supports an emphasis on increasing returns to scale mechanisms.”
The paper is quite good and well worth reading in full.
Joseph Weisenthal (@TheStalwart) of Bloomberg put together a very cool representation of US world trade in 2013. I’ve seen trade data presented in many different forms, but none as good as this. I think I’ll use this in my classes today.
Robin just posted an interesting map of who trades with who, showing that China was the #1 trade partner of a number of African countries. Now here’s me posting a map of “the language of business” across African countries.
You can clearly see the colonial legacies, but what’s interesting to me is imagining how business must be conducted in those nations.
For example, in Angola, the language of business is Portuguese, but the #1 trade partner is China. How does that work exactly? Interpreters? Portuguese fluent Chinese traders? Chinese fluent Angolan importers?
My best guesses are (A) No Angolan participation in the “trade” it’s Chinese firms all the way down, or (B) the language map is kind of BS and everyone speaks English when doing international trade.
Perhaps someone with actual knowledge of the Angolan import market could weigh in?
Mexico, Colombia, Peru & Chile are on the way to creating a large single market (over 200 million people) with the recently ehanced Pacific Alliance. Costa Rica and Panama want in.
I think they call it the Pacific Alliance because Argentina, Venezuela and Brazil are Atlantic nations which are the backbone of the less ambitious Mercosur pact.
It may also be code for “hey Asia, we are open for business”, like our own likely still-born Trans Pacific Partnership.
My stack of reading material is increasing daily. The latest addition is called “Borders, Ethnicity and Trade” and it is forthcoming in the JDE (click here for an earlier, ungated version). The paper looks to be really interesting on the topics of geography and ethnicity. Below is the abstract:
This paper uses unique high-frequency data on prices of two agricultural goods to examine the additional costs incurred in cross-border trade between Niger and Nigeria, as well as trade between ethnically distinct markets within Niger. We find a sharp and significant conditional price change of about 20 to 25 percent between markets immediately across the national border. This price change is significantly lower when markets on either side of the border share a common ethnicity. Within Niger, trade between ethnically distinct regions exhibits an ethnic border effect that is comparable, in its magnitude, to the national border effect between Niger and Nigeria. Our results suggest that having a common ethnicity may reduce the transaction costs associated with agricultural trade, especially the costs associated with communicating and providing credit.
I recently wrote about how US export restrictions on natural gas are distorting markets and creating inefficiencies and/or pollution both here and abroad.
Here, from the mighty WAPO is a great graphic showing the geographic price gaps in gas:
You can see in 2004-2007, how the prices tracked reasonably closely. This was before the boom in American production, when we imported a lot of gas. Since the US production boom, US prices have fallen while European and Asian prices have risen, creating a big wedge that is being sustained, in a large part, by our export restrictions.
People, a 3-5 fold difference in the price of energy inputs can cause a lot of production distortions/inefficiencies.
It’s past time to just go ahead and let our gas out.