Why did the countries which first benefitted from access to the New World - Castile and Portugal - decline relative to their followers, especially England and the Netherlands?

Comparative European Institutions and the Little Divergence, 1385-1800. António Henriques, Nuno Palma. EHES Working Paper, No. 171, November 2019. http://ehes.org/EHES_171.pdf

Abstract: Why did the countries which first benefitted from access to the New World - Castile and Portugal - decline relative to their followers, especially England and the Netherlands? The dominant narrative is that worse initial institutions at the time of the opening of Atlantic trade explain Iberian divergence. In this paper, we build a new dataset which allows for a comparison of institutional quality over time. We consider the frequency and nature of parliamentary meetings, the frequency and intensity of extraordinary taxation and coin debasement, and real interest spreads for public debt. We find no evidence that the political institutions of Iberia were worse until at least the English Civil War.

JEL Codes: N13, N23, O10, P14, P16
Keywords: Atlantic Traders, New Institutional Economics, The Little Divergence



4. Conclusion

Iberia's economic divergence was not a consequence of inferior initial institutions. At
least prior to the civil wars of the mid seventeenth century, England did not have more
constraints on executive power or an environment more protective of property rights than
Spain or Portugal. Unlike what is argued by authors such as Tilly (1994), Acemoglu et al.
(2005) and Hough and Grier (2015), Iberian political institutions were not structurally
worse than England. At some point England did have better institutions, but that point
occured considerably later than 1500. Accordingly, explanations for the little divergence
among Atlantic traders which rely on variation in the quality of \initial institutions" (in
particular, constraints on executive power by 1500 or earlier), such as that by Acemoglu
et al. (2005), cannot be correct.42
While 1500 is too early for any significant di erence in institutional quality to be
noticeable, 1688 is too late. With regards to England, the measures that we present in this
paper confirm the views of scholars who argue that the emphasis of North and Weingast
(1989) and others on the Glorious Revolution is overdone and instead emphasize earlier
progress (e.g. O'Brien, 1988, 2002, 2012; Jha, 2015; Murrell, 2017). By 1688 England
was already driving ahead both in terms of checks on executive power and state capacity.
At the same time, Iberian institutions experienced a considerable deterioration over the
late seventeenth century: the Cortes eventually stopped meeting, the monarchs resorted
to monetary manipulations and public debt was issued less frequently and became less
liquid.
Our findings also discredit the modern incarnation of the "Black Legend" (La Leyenda
Negra), the notion that the divergent economic trajectories within Europe and the two
Americas can be explained by an institutional path-dependence going back as far as
the sixteenth century or earlier. As argued, when Atlantic trade developed, Portugal
and Spain could not be dismissed as "highly absolutist" or extractive empires, let alone
regarded as endowed with inferior institutions. The right of non-European municipalities
to take part in the Cortes is a reminder of how these empires were built under an executive
power that had to negotiate instead of simply imposing.
In this paper we have shown that the little divergence in European institutions and
incomes does not lie with the deus ex machina of initial institutions going back to the
medieval period. An implication is that they must instead be found in events taking place
during the early modern period. Another implication is that the lackluster economic performance
of the Iberian empires and their successor independent states in Latin America
was not the result of an institutional path-dependence defined circa 1500.