Why Nations Fail Illustrated

Lecture5

Origins of Inclusive Institutions #1: Why England, not Spain?

November 6, 2018

Masayuki Kudamatsu

Chapter 4 & pp. 208-212

Today's Road Map

Black Death and

the divergence of Western and Eastern Europe

Rise of Atlantic trade

and the divergence of England and Spain

Critical junctures

and the divergence of institutions

Term paper preparation #1

Today's Road Map

Black Death and

the divergence of Western and Eastern Europe

Rise of Atlantic trade

and the divergence of England and Spain

Critical junctures

and the divergence of institutions

Term paper preparation #1

Black Death: 1346-1353

Wiped out about half of the population in Europe

Economic institutions in 14th-century Europe

King

Lords

Peasants

(Serfs)

Land

Military services

Unpaid labor,

Fines, Taxes

Land

Peasants need permission from lords to move out

cf. Ethiopia's gult system (Lecture 4)

Feudalism

Feudalism is a form of forced labor

economic institutions
Secure
for everyone
Property rights Insecure
for majority of people
Free Occupational
choice
Forced labor
Free Entry of new businesses Prevented by monopolies
Unbiased System of laws Biased for
the powerful/rich
Promoted Public service provision Discouraged

Economic Institutions

Inclusive

Extractive

Property rights

Secure for everyone

Insecure for

majority of people

Occupational choice

Free

Forced labor

Entry of

new businesses

Free

Prevented by

monopolies

System of laws

Unbiased

Biased for

the powerful / rich

Public service provision

Provided

Limited

Feudalism is thus extractive econ. institutions

However, Western and Eastern Europe were not completely the same at that time

Rise of towns in Western Europe by 1300

Source: Frederic Delouche ed. (2001) Illustrated History of Europe (2nd ed.) Cassell & Co, p. 147

Peasants in Western Europe could escape into these towns

Western Europe:

Rise of towns

Peasants have bargaining power

Eastern Europe:

Dominantly rural

Lords (relatively) powerful

Divergent path btw. Western/Eastern Europe

NOTE:

Chapter 4 of Why Nations Fail does not

(1) mention peasants' bargaining power

(2) explain why towns made a difference

This lecture note is based on Acemoglu and Wolitzky (2011), which is cited as the source for Chapter 4 (page 469)

Western Europe:

Rise of towns

Peasants have bargaining power

Eastern Europe:

Dominantly rural

Lords (relatively) powerful

Black Death

Peasants' demand for freedom prevailed

End of Feudalism

Divergent path btw. Western/Eastern Europe

Case of England

Statute of Laborers of 1351

Punish peasants for leaving employment w/o permission of lords

Peasants' Revolt of 1381

Rebels, led by Wat Tyler, captured most of London

The English state gave up enforcing Statute of Laborers

Image source: luminarium.org

Western Europe:

Rise of towns

Peasants better-organized

Eastern Europe:

Dominantly rural

Lords (relatively) powerful

Black Death

Peasants' demand for freedom prevailed

End of Feudalism

Lords intensified forced labor

Second Serfdom

Divergent path btw. Western/Eastern Europe

Western Europe:

Rise of towns

Peasants better-organized

Eastern Europe:

Dominantly rural

Lords (relatively) powerful

Black Death

Peasants' demand for freedom prevailed

End of Feudalism

Lords intensified forced labor

Second Serfdom

Divergent path btw. Western/Eastern Europe

Rising demand for foods

in Western Europe after 1500

e.g.

Unpaid works in Second Serfdom

Korczyna in Poland

About 50% of works in 1600

Mecklenburg in eastern Germany

1 day per week in 1550

3 days per week in 1600

Hungary

By legislation, 90% of rural population forced to work unpaid

1 day per week in 1514, 2 days in 1550, 3 days by 1600

Today's Road Map

Black Death and

the divergence of Western and Eastern Europe

Rise of Atlantic trade

and the divergence of England and Spain

Critical junctures

and the divergence of institutions

Term paper preparation #1

Rise of Atlantic Trade in 16th century

"Discovery" of the Americas

by Christopher Columbus

in 1492

Massive trade opportunities opened up

Precious metals (gold, silver, etc.)

Plantation crops

Slaves

Landing of Columbus (12 October 1492), painted by John Vanderlyn

Image source: Wikimedia Commons

Political institutions in England vs Spain in 1500s

Both had an assembly of citizens

Parliament in England (Lecture 3)

Cortes in Spain (Lecture 4)

Monarch needed to consult with them to raise new taxes

Monarch was (only slightly) weaker in England than in Spain

Scope of taxation: larger in England

Representation by parliament: broader in England

England:

(relatively) Strong

Parliament

Spain:

(relatively) Weak

Cortes

Rise of Atlantic Trade

Merchant class emerged

Monarch monopolized trade

Divergent path between England & Spain

702 exporters &

1283 importers

in London

by 1688 (p. 210)

Spanish monarch

financially

independent

from Cortes

England:

(relatively) Strong

Parliament

Spain:

(relatively) Weak

Parliament

Rise of Atlantic Trade

Merchant class emerged

Glorious Revolution of 1688

Crown monopolized trade

Absolutism persisted

(Lecture 4)

Divergent path between England & Spain (cont.)

England:

(relatively) Strong

Parliament

Spain:

(relatively) Weak

Parliament

Rise of Atlantic Trade

Merchant class emerged

Glorious Revolution of 1688

Crown monopolized trade

Absolutism persisted

(Lecture 4)

But this divergence could have been reversed

Invasion of Spanish Armada in 1588

English privateers challenged Spanish monopoly of Atlantic trade

 

The Spanish Crown

sent its Invincible Armada

to attack England

 

Image source: Wikimedia Commons

England:

(relatively) Strong

Parliament

Spain:

(relatively) Weak

Parliament

Rise of Atlantic Trade

Merchant class emerged

Glorious Revolution of 1688

Crown monopolized trade

Absolutism persisted

(Lecture 4)

But this divergence could have been reversed

Spanish Armada in 1588

Defeat of Spanish Armada in 1588

Bad

weather

Last-minute appointment

of Spanish command-in-chief

English privateers challenged Spanish monopoly of Atlantic trade

 

The Spanish Crown

sent its Invincible Armada

to attack England

 

England defeated Spanish Armada, largely by chance

+

Image source: Wikimedia Commons

England:

(relatively) Strong

Parliament

Spain:

(relatively) Weak

Parliament

Rise of Atlantic Trade

Merchant class emerged

Glorious Revolution of 1688

Crown monopolized trade

Absolutism persisted

(Lecture 4)

Defeat of Spanish Armada in 1588

Divergent path between England & Spain

Today's Road Map

Black Death and

the divergence of Western and Eastern Europe

Rise of Atlantic trade

and the divergence of England and Spain

Critical junctures

and the divergence of institutions

Term paper preparation #1

Society A:

(slightly) more inclusive

Society B:

(slightly) more extractive

Theory of institutional divergence (1/4)

No two societies create the same institutions

Society A:

(slightly) more inclusive

Society B:

(slightly) more extractive

Critical Juncture

Theory of institutional divergence (2/4)

Black Death in 14c

Rise of Atlantic trade in 15c

Industrial Revolution in late 18c

European colonization

Examples

Society A:

(slightly) more inclusive

Society B:

(slightly) more extractive

Critical Juncture

Theory of institutional divergence (3/4)

Power balance tilted for the ruled

Power balance tilted for the rulers

Society A:

(slightly) more inclusive

Society B:

(slightly) more extractive

Critical Juncture

Power balance tilted for the ruled

Inclusive institutions

Power balance tilted for the rulers

Extractive institutions

Theory of institutional divergence (4/4)

Today's Road Map

Black Death and

the divergence of Western and Eastern Europe

Rise of Atlantic trade

and the divergence of England and Spain

Critical junctures

and the divergence of institutions

Term paper preparation #1

Pick a country

And discuss whether 

Theory of Why Nations Fail can

explain economic performances

of the country of your choice

Term Paper

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

Theory of Why Nations Fail

Extractive Economic Institutions

Economic Stagnation

Extractive Political Institutions

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

So you need to know that in the country of your choice...

Extractive Economic Institutions

Economic Stagnation

Extractive Political Institutions

Are political institutions

inclusive

or

extractive?

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

So you need to know that in the country of your choice...

Extractive Economic Institutions

Economic Stagnation

Extractive Political Institutions

Are economic institutions

inclusive

or

extractive?

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

So you need to know that in the country of your choice...

Extractive Economic Institutions

Economic Stagnation

Extractive Political Institutions

Is the economy

growing

or

stagnated?

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

If it turns out, for example, ...

Extractive Economic Institutions

Economic Stagnation

Extractive Political Institutions

The theory fails

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

If it turns out, for example, ...

Extractive Economic Institutions

Economic Stagnation

Extractive Political Institutions

The theory fails

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

Evidence is consistent with the theory if

Extractive Economic Institutions

Economic Stagnation

Extractive Political Institutions

It would be nicer if you find

evidence for causality

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

Evidence is consistent with the theory if

Extractive Economic Institutions

Economic Stagnation

Extractive Political Institutions

It would be nicer if you find

evidence for causality

So you need to find information on

Economic Institutions

Economic Performance

Political Institutions

So you need to find information on

Economic Institutions

Economic Performance

Political Institutions

Today we learn where to learn economic performance

Measure of economic performance

GDP per capita

Average annual income of a person living in the country

For detail, pick any introductory textbook on macroeconomics such as Jones (2017), Mankiw (2018), Acemoglu et al. (2018)

Data source for GDP per capita

Published by the World Bank

1. Click the link above

2. Click

3. Type "GDP per capita"

Which should you choose?

Then you'll see this:

You need to understand "current", "constant", and "PPP"

GDP in current $ (aka. nominal GDP)

"Current" doesn't take into account inflation

Economic growth typically comes with inflation

Ignoring inflation will overrepresent economic growth

100 yen in 1960 = 568.29 yen in 2018 (source: InflationTool.com)

e.g.

Some poor countries suffer from hyperinflation

e.g.

1,000,000% in Venezuela in 2018 (source: Reuters)

GDP in constant $ (aka. real GDP)

"Constant" does take into account inflation

GDP

(constant 2010 $)

GDP

(current $)

Inflation rate

since 2010

=

PPP (Short for "Purchasing Power Parity")

Used for international comparison

Foreign exchange rate

Many services (e.g. haircut) are not exported or imported

Investors speculate in the currency market

Japanese yen appreciates

whenever the world economy becomes uncertain

e.g.

price level difference across countries

\neq
\neq

PPP (cont.)

PPP is the "real" exchange rate

e.g.

Very simple version of PPP: the Big Mac index

Image source: The Economist

WDI's PPP is based on

cross-country price surveys by International Comparison Program

Then which indicator should you use?

Create a graph

Once you choose the indicator, click it.

Then click "DataBank" on the lower right. 

Select "Country" and "Time". Click "Chart" on top right

WDI dates back to 1960 at most

Historical GDP data

Maddison Project Database

provides the best estimates of historical GDP data

October 30

Chapter 4

November 6

Chapter 1

November 13

Chapter 10

United States

vs Mexico

from colonization

to early 20c

Weeks 5-7: Origins of inclusive institutions

Western

vs Eastern Europe

after Black Death

in 14c

 

Spain vs England

after Rise of Atlantic

Trade in 16c

Australia

 

French Revolution

and its spread to

Western Europe

 

Japan vs China

in 19c

Next week

Your to-do list until next class

Pick a country for your term paper

and post it on Prulu (if you haven't)

Read Chapter 1

and post questions on Prulu

1

2

3

Visualize the economic performance of the country of your choice

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