Why Nations Fail Illustrated

Lecture 6

Origins of Inclusive Institutions #2

Why North, not Latin, America?

November 13, 2018

Masayuki Kudamatsu

Chapter 1

Today's Road Map

Spanish Colonization of the Americas

English Colonization of North America

Political Institutions of the U.S. and Mexico after independence

Term paper preparation #2

Economic Institutions of the U.S. and Mexico

Consequences: Two Nogales

Today's Road Map

Spanish Colonization of the Americas

English Colonization of North America

Political Institutions of the U.S. and Mexico after independence

Term paper preparation #2

Economic Institutions of the U.S. and Mexico

Consequences: Two Nogales

Spanish conquest of Americas

Source: Frederic Delouche ed. (2001) Illustrated History of Europe (2nd ed.) Cassell & Co, p. 212

Spanish conquest of Americas (cont.)

Spanish colonists want

(1) local people to work for them

(2) gold & silver to plunder

Asuncion discovered in 1537

e.g.

But no minerals to extract

Local hunter-gatherers difficult to coerce

Buenos Aires founded in 1534

Local farmers easy to coerce

Buenos Aires abandoned by 1541

Encomienda

Spanish King

Spanish colonists

Indigenous peoples

Indigenous peoples

Spread of Christianity

Tribute

Forced labor

Christianity

Later force every adult man to annually pay a head tax in silver

Economic institutions in Spanish Americas (cont.)

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

Mita

1545: Large silver mines discovered in Potosi

Need a lot of miners to extract silver

1573-1825:

1/7 of adult men

in the designated area

were forced to work

in Potosi mines

Source: Figure 1 of Dell (2010)

Economic institutions in Spanish Americas (cont.)

Economic institutions in Spanish Americas (cont.)

Force locals to buy goods at the prices determined by Spaniards

Trajin

Force locals to carry heavy loads of goods for Spanish businesses

e.g. wine, coca leaves, textiles

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

Economic institutions in Spanish Americas (cont.)

Force locals' living standards down to a subsistence level

Extract all income in excess for Spaniards

Today's Road Map

Spanish Colonization of the Americas

English Colonization of North America

Political Institutions of the U.S. and Mexico after independence

Term paper preparation #2

Economic Institutions of the U.S. and Mexico

Consequences: Two Nogales

English conquest of North America

English colonists initially wanted the same as Spanish did

(1) local people to work for them

(2) gold & silver to plunder

e.g.

Jamestown, Virginia

Image source: Wikimedia Commons

Founded in 1607

English settlers:

search for precious metals

run low on food in winter

attempted to capture local chief

English conquest of North America (cont.)

Once failed, the English elite tried to force English settlers to work

Virginia Company for Jamestown (1610)

Lord Baltimore in Maryland (1632)

Anthony Ashley-Cooper in Carolina (1663)

All these attempts failed

English settlers ran away

English conquest of North America (cont.)

Image source: Map 2 of Why Nations Fail (p. 24)

Forced labor

didn't work

Population density in 1500

North America

was sparsely populated

Birth of Inclusive Institutions in North America

Virginia Company gave each male settler in Jamestown

50 acres per his family member & servant

General Assembly was introduced in Jamestown

where each adult man has a say in politics

By 1720s,

all 13 colonies had

assemblies of

male property owners

1618

Incentives to work hard

1619

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

Inclusive

Extractive

Both

Plurality

and

Centralized

State

Either

Absolutist

or

Lack of

Centralization

Political Institutions

Today's Road Map

Spanish Colonization of the Americas

English Colonization of North America

Political Institutions of the U.S. and Mexico after independence

Term paper preparation #2

Economic Institutions of the U.S. and Mexico

Consequences: Two Nogales

Mexico's independence from Spain in 1821

The colonial elite decided to declare independence

Napoleon occupied Spain except for the port of Cadiz

The Spanish king was captured and abdicated

Spain adopted the Cadiz Constitution

Constitutional monarchy

Equality before the law

Abolishing all forms of labor coercion

1808

1820

1821

Political instability in 19c Mexico

52 presidents in 43 years

mostly unconstitutionally seizing power

Lost Mexican-American War,

giving up New Mexico and Arizona

to the U.S.

1822

President Augustin de Iturbide dismissed congress

1824-1867

Severe weakening of the state

1848

1836

Texas declared independence (annexed to U.S. in 1846)

Inclusive

Extractive

Both

Plurality

and

Centralized

State

Either

Absolutist

or

Lack of

Centralization

Political Institutions

19th-century politics in U.S.

One proslavery and one antislavery state were always added to the union together, to keep the balance in the Senate

Civil Wars (1860-65) didn't last forever

Allocation of Congressional seats among states

Southern states want:

Slaves to be counted as well

Compromise: Count a slave as 3/5 of a free person

Missouri Compromise

Northern states want:

In proportion to population excluding slaves

Inclusive

Extractive

Both

Plurality

and

Centralized

State

Either

Absolutist

or

Lack of

Centralization

Political Institutions

Today's Road Map

Spanish Colonization of the Americas

English Colonization of North America

Political Institutions of the U.S. and Mexico after independence

Term paper preparation #2

Economic Institutions of the U.S. and Mexico

Consequences: Two Nogales

Economic institutions of U.S. vs Mexico

Who obtains monopoly rights

Banking sector

Late 19c expansion of international trade

Antitrust law enforcement

Patent system in U.S.

Granted to all sorts of people

Only 19% were the sons of landowners & professionals

40% attended only primary school or less

Who obtains monopoly rights

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

Porfirio Diaz's dictatorship (1876-1910)

Land expropriated

Monopolies granted to his supporters

Who obtains monopoly rights (cont.)

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

Banking sector

U.S. politicians in 18th century

Set up state bank monopolies

Give to their friends in exchange for part of monopoly profits

Borrow money from banks

But such politicians lost elections

# of banks rose from 338 in 1818 to 27,864 in 1914

Offer cheap loans to those with patent to start businesses

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

Banking sector (cont.)

Mexican politicians

Set up state bank monopolies

Give to their friends in exchange for part of monopoly profits

Borrow money from banks

Such politicians could stay in power

1910: only 42 banks with top 2 controlling 60% of assets

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

Late 19c expansion of international trade

Image source:

Wikimedia Commons

By 1870

Steamship became economically viable for transoceanic trades

Late 19c expansion of international trade (cont.)

Source:

Figure 3 of Pascali (2017)

Total tonnage of British vessels for international trade

entering in British ports

Late 19c expansion of international trade (cont.)

Source: Figure 1 Panel A of Pascali (2017)

World Exports at constant prices (1990 US dollars in million)

Late 19c expansion of international trade (cont.)

Vast "open" spaces of the Americas became valuable

Crops to cultivate

Minerals to extract

could now be cheaply transported to Europe

Who could access to these "open" spaces in U.S. and Mexico?

Late 19c expansion of international trade (cont.)

Mexico (and most other Latin American countries)

Frontier lands allocated to the politically powerful

30,000 of Yaqui people of Sonora:

deported to work in henequen plantations of Yucatan

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

Late 19c expansion of international trade (cont.)

U.S.

Frontier lands given to broad range of people by legislative acts

"By 1934, over 1.6 million homestead applications were processed and more than 270 million acres—10 percent of all U.S. lands—passed into the hands of individuals" (U.S. National Archives)

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

Antitrust law enforcement

Bill Gates and Carlos Slim: the world's two richest men

Image source:

Forbes.com

Antitrust law enforcement (cont.)

Bill Gates

Sued by U.S. Department of Justice in 1998

for abusing monopoly power

to force Windows customers to use Internet Explorer

Carlos Slim

Became rich by acquiring Telmex (privatized telecom monopoly)

His bid for auction wasn't the highest

Investigated by Mexican Competition Commission in 1996

He settled the case by withdrawing the bundling

But regulatory authorities couldn't limit his monopoly power

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

Today's Road Map

Spanish Colonization of the Americas

English Colonization of North America

Political Institutions of the U.S. and Mexico after independence

Term paper preparation #2

Economic Institutions of the U.S. and Mexico

Consequences: Two Nogales

Two Nogales

Image source: mapsofworld.com

Nogales, Sonora

Mexico

Same geography & culture (both were part of Mexico until 1853)

Image source:

Wikimedia Commons

Two Nogales circa 1899

Nogales, Arizona

U.S.

Nogales, Sonora

Mexico

Image source:

William Bird at Flickr

Two Nogales today

Nogales, Arizona

U.S.

Nogales, Sonora

$10,000 / year

Teenagers NOT in school

High infant mortality

No public health care

Roads in bad conditions

High crime rates

Two Nogales today (cont.)

Nogales, Arizona

$30,000 / year

Teenagers in school

High life expectancy

Medicare

Good infrastructure

Law and order

Today's Road Map

Spanish Colonization of the Americas

English Colonization of North America

Political Institutions of the U.S. and Mexico after independence

Term paper preparation #2

Economic Institutions of the U.S. and Mexico

Consequences: Two Nogales

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

How to measure economic institutions?

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

How to measure economic institutions?

For this aspect of institutions, there is a famous dataset

Conducted by World Bank (annually since 2004)

Law firms are surveyed to collect cross-country data on

Operates in the largest business city

100% domestically owned

10-50 employees

etc.

Business environments for a hypothetical, identical firm

Among 11 indicators, the following is relevant to us

Starting a business

# of procedures

# of days

Amount of fees

Amount of minimum capital

Doing Business surveys (cont.)

to register business

Examples of procedures to set up a firm

Source: Table 1 of Djankov et al. (2002)

Doing Business surveys (cont.)

Policy-makers in developing countries want to be ranked high

to attract foreign investment

In 2014

India's Prime Minister

Narendra Modi publicly

said he would aim 50th

e.g.

Image source: Scroll.in

Doing Business surveys (cont.)

Limitations

Doesn't measure the actual enforcement

Hypothetical firm may be irrelevant for a country

See Besley (2015) for more detail

Doing Business surveys (cont.)

How to obtain data

Click the blue "Select an economy" button

Search for your country

Week Five

Chapter 4

Week Six Chapter 1

Week Seven

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

Read Chapter 10 & pp. 362-363

and post questions on Prulu

1

2

3

Visualize the economic performance

of the country of your choice (if you haven't)

Summarize the regulation of entry

in the country of your choice

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