Monday, October 26, 2020

"Shipwrecked by rents"

From VoxEU, October 25:

The Spanish Crown had a monopoly on the trade route between Manila and Mexico for more than 250 years. The ships that sailed this route were “the richest ships in all the oceans”, but much of the wealth sank at sea and remain undiscovered. This column uses a newly constructed dataset of all of the ships that travelled the route to show how monopoly rents that allowed widespread bribe-taking would have led to overloading and late ship departure, thereby increasing the probability of shipwreck. Not only were late and overloaded ships more likely to experience shipwrecks or to return to port, but the effect is stronger for galleons carrying more valuable, higher-rent cargo. This sheds new light on the costs of rent-seeking in European colonial empires.
In 2011 underwater archaeologists discovered the remains of the San José, a galleon sunk near Lubang Island, Philippines, in July 1694. It was one of 788 galleons that sailed between Manila and Acapulco, Mexico, between 1565 and 1815 as part of the Manila Galleon trade. The San José was laden with a huge amount of silks and spices, over 197,000 works of Chinese and Japanese porcelain, 47 chests full of objects of worked gold, and hundreds of other chests containing precious stones and objects, the total value of which was recorded as 7,694,742 pesos or more than $500 million in today’s money.

What does the sinking of the San José tell us about the costs of colonial trading regimes and the costs of corruption or rent-seeking more generally? This is a question that goes back to Adam Smith (1776).

From Tullock (1967) and Krueger (1974), we understand that the overall welfare costs of corruption can exceed the gains to the beneficiaries; from Shleifer and Vishny (1993), we know that the industrial structure of rent-seeking matters. We also have rigorous empirical studies of the costs of corruption in modern settings ranging from Indonesia (Olken and Barron 2009) and India (Niehaus and Sukhtankar 2013) to sub-Saharan Africa (Reinikka and Svensson 2004). But little empirical work has been done on colonial trading regimes.

In a recent paper (Arteaga et al. 2020), we examine the costs of corruption in the context of the Manila Galleon trade. The Manila Galleon trade was the longest, most profitable, and most celebrated colonial-era trade route. Importantly, the galleon trade was a government monopoly. The Spanish Crown owned the ships and restricted the number of voyages to one per year between Mexico and Manila; it also restricted the number of ships that could sail as part of each voyage. These restrictions made space on each galleon extremely valuable.

There was tremendous demand in Mexico and Spain for East Asian silks, textiles, porcelain, and lacquerware. Merchants from mainland Asia would arrive in Manila in May, bringing with them these highly valued goods, which they exchanged with Manila-based merchants for silver. These Manila merchants would then seek to load their cargo on galleons bound for Mexico. Space on each was rationed; officially, only individuals with tickets (boleta) were allowed to load their cargo. In practice, however, corruption was widespread, and merchants could bribe ship captains to carry additional cargo....


HT FT Alphaville's Further Reading post.


We skipped over:
Chapter 3 A journey of dread

If interested see also "The First Global City" on the Potosi -Manila connection.

*The Potosi - China connection was a pretty big deal with many scholars pinpointing the founding of the trading crossroads and entrepôt of the city of Manila in 1571 as the beginnings of trans-Pacific trade e.g.:

Born with a "Silver Spoon": The Origin of World Trade in 1571
Silver, Silk and Manila: Factors leading to the Manila Galleon Trade

“Path Dependence, Time Lags and the Birth of Globalisation:A Critique of O’Rourke and Williamson”