Lecture 6 - Foundations of the European Miracle PDF

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Lecture 6 - Claudia Rei...

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Lecture 6 - Foundations of the European Miracle • The European Miracle considers the view that Europe overtook Asia instead of Asia falling behind. • The key features of the European Miracle: an effective decentralised state, private-order institutions, the late medieval commercial revolution, and the late medieval agricultural revolution. • Italian City States (Venice, Genoa & Florence) Shipping & Commerce - Italian City States were highly urbanised. Venice re-opened trade after the fall of the Roman Empire, and the Genoese naval victory in 1291 over Morocco opened the straits of Gibraltar. Agriculture & Industry - Trade related industries emerged as key economic sectors. Import substitution was key and high food productivity allowed specialisation in industry. Finance - Trade required a system of payment which led to the emergence of banking from moneychangers. Overdrafts and marine insurance emerged. Key factors behind the Italian success - The state was heavily involved in ship building and leasing publicly owned galleys to private enterprise. The state arranged the organisation and timing of trade conveys. A democratic system of governance, an improved organisation of agriculture, a regulated government bond market and legal institutions to enforce property rights contributed to success. • Portugal & 'The Great Discoveries' Shipping & Commerce - Portugal overtook Italy as the leader in shipbuilding during the 15th century. The 'Great Discoveries' of India (1497), Canton (1513) and Japan (1550) allowed Portugal to establish trading ports from Mozambique to Indonesia, also establishing major slave and sugar colonies. Slavery & Sugar - 4.5 million slaves were shipped by Portugal to the Americas from 1500-1870, 50% of total slaves shipped. The slave trade received papal legitimacy in 1455. Portugal replaced Venice as the main producer of sugar. Agriculture & Industry - Agriculture and industry remained backward, holding back GDP per capita growth. Key factors behind the Portuguese success - The state established a centre of navigators and mapmakers, 'The School of Sagres'. The country's location on the Atlantic with access to the Mediterranean was advantageous. The Ottoman-Venetian Wars combined with Portugal's discoveries in around Africa crippled Venice and broke their trade monopoly. Portugal's success, however, was not based on good institutions as with other nations. • The Dutch 'Golden Age' Shipping & Commerce - Amsterdam became entrepot in Northwest Europe. By the 16th century, the Dutch fleet was the largest in Europe, replacing Portugal as the dominant European traders in Asia by the 17th century. Agriculture & Industry - Agriculture was extremely productive; by 1700 agriculture was only 40% of total employment, lower than the rest of Europe. Industry was generally less productive than agriculture. Finance - Holland developed bills of exchange and established the Amsterdam Exchange, the world's first security market. Perpetual annuities were issued by government free of risk of default. Key factors behind the Dutch success - The state established monopoly trading companies, such as the Dutch East India Company (1602). Institutions were favourable to merchants and the free flow of knowledge. • The Phases of the European Miracle: Phase 1, Mediterranean Countries respond to the Black Death: Italy captured the opportunity to trade overland and via the Mediterranean with Asia. Phase 2, Northwest Europe responds to the great discoveries: Holland captures the opportunity to break the Portuguese monopoly and Britain then captures the opportunity to break the Dutch

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monopoly. Phase 3, Modern Economic Growth: Britain captured the opportunity for sustained economic growth. Italy & the 1st critical juncture Greif [1993] explored the collectivist vs individualistic society in Mediterranean trade. Maghribi traders were collectivist. They sent members abroad to operate in foreign countries. The fear of collective punishment kept agents honest. It did not require state involvement or a formal legal system. Genoese traders were individualist. They hired traders outside of the organisation with renewable contracts. The punishment for a breach of contract was the loss of profits of the contract. The system required formal procedures and a system of contract enforcement. China & the 1st critical juncture Chinese ships were larger and more advanced. The voyages of Zheng He, 15th century, reached much of Asia and Africa. Internal conflicts and changes in government led to 'turn-inwards', which involved the burning of the fleet. Merchant activities were viewed less positively in the Ming Dynasty Confucianism. Northwest Europe & the 2nd critical juncture Atlantic traders became more urbanised, receiving higher per capita incomes. Atlantic trade was of greater significance, with more voyages and higher volumes. Atlantic ports developed more rapidly than non-Atlantic ports. Greater wealth, urbanisation and commercialisation led to success. Acemoglu et al. [2005] argue that the effects of Atlantic trade only guaranteed short-run success without good institutions. Atlantic trade explains why Italy fell behind Britain and the Netherlands. It is, however, bad institutions that explain why Portugal and Spain fell behind Britain and the Netherlands. Modern Economic Growth has 6 characteristics per Kuznets [1966]. Sustained rates of population growth and GDP per capita, significant evidence of structural change, urbanisation and secularisation, rapid transport and communications, wide gaps between rich and poor countries, and high and sustained growth of efficiency. Britain became the first example of Modern Economic Growth during the Industrial Revolution. The Netherlands did not have sustained economic growth and never achieved Schumpeterian growth, their growth was based on Smithian growth. Europe had 'good' institutions necessary for long-run growth. Europe capitalised on opportunities for trade and commerce. Europeans monopolised trade on the Mediterranean, exploited their advantageous position in the Atlantic and capitalised on Asian commercial failings. Trade combined with 'good' institutions led to long-run growth. Pre-Modern European success was based on Smithian growth. Britain was the 1st economy to transition to Modern Economic Growth.

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