rise-of-europe

The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth By DARON ACEMOGLU, SIMON JOHNSON, AND JAMES ROBINSON* The rise of Western Europe after 1500 is due largely to growth in countries with access to the Atlantic Ocean and with substantial trade with the New World, Africa, and Asia via the Atlantic. This trade and the associated colonialism affected Europe not only directly, but also indirectly by inducing institutional change. Where “initial” political institutions (those established before 1500) placed significant checks on the monarchy, the growth of Atlantic trade strengthened merchant groups by constraining the power of the monarchy, and helped merchants obtain changes in institutions to protect property rights. These changes were central to subsequent economic growth. (JEL F10, N13, O10, P10) The world we live in was shaped by the rapid economic growth that took place in nineteenth- century Western Europe. The origins of this growth and the associated Industrial Revolution are generally considered to lie in the economic, political, and social development of Western Europe over the preceding centuries. In fact, between 1500 and 1800, Western Europe expe- rienced a historically unprecedented period of sustained growth, perhaps the “First Great Di- vergence” (i.e., the first major sustained diver- gence in income per capita across different regions of the world), making this area substan- tially richer than Asia and Eastern Europe. There is little agreement, however, on why this growth took place in Western Europe and why it started in the sixteenth century. This paper establishes the patterns of eco- nomic growth in Western Europe during this era, develops a hypothesis on the origins of the rise of (Western) Europe and provides historical and econometric evidence supporting some of the implications of this hypothesis. We document that the differential growth of Western Europe during the sixteenth, seven- teenth, eighteenth, and early nineteenth centu- ries is almost entirely accounted for by the growth of nations with access to the Atlantic Ocean, and of Atlantic traders. Throughout the paper, the term Atlantic trader refers to Britain, France, the Netherlands, Portugal, and Spain, the nations most directly involved in trade and colonialism in the New World and Asia. Atlan- tic trade, in turn, means trade with the New World, as well as trade with Asia via the Atlan- tic, and includes colonialism- and slavery- related activities.1 The differential growth of Atlantic traders suggests a close link between Atlantic trade and the First Great Divergence. In fact, it appears that the rise of Europe between 1500 and 1850 is largely the rise of Atlantic * Acemoglu: Department of Economics, Massachusetts In- stitute of Technology, E52-371, Cambridge, MA 02142 (e-mail: daron@mit.edu); Johnson: Sloan School of Manage- ment, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, MA 02139 (e-mail: sjohnson@mit.edu); Robinson: Department of Government, Harvard University, 1875 Cambridge Street, Cambridge, MA 02138 (e-mail: jrobinson@gov.harvard.edu). We thank Thomas Becker and Rui Pedro Esteves for outstanding research assistance and Josh Angrist, Abhijit Banerjee, Dora Costa, Jan de Vries, Stanley Engerman, Philip Hoffman, Peter Lindert, Sebastia´n Mazzuca, Joel Mokyr, Larry Neal, Steve Pincus, Christina Romer, David Romer, Andrei Shleifer, Alan Taylor, Hans-Joachim Voth, two anonymous referees, and seminar participants at the University of California, Berkeley, the Canadian Institute of Advanced Research, University of Chicago Graduate School of Business and Department of Political Science, George Mason Univer- sity, Harvard Business School, the Harvard Economic History Seminar, the London School of Economics, MIT, the National Bureau of Economic Research economic history, inequality, and economic growth groups, New York University, and Princeton University for comments and suggestions. 1 Atlantic trade opportunities became available only dur- ing the late fifteenth century, thanks to the discovery of the New World and the passage to Asia around the Cape of Good Hope. These discoveries resulted from a series of innovations in ship technology, primarily pioneered by the Portuguese, that changed the rigging and hull design of ships and developed knowledge of oceanic navigation. 546 Europe, and is quite different in nature from the European growth that took place before 1500. Not all societies with access to the Atlantic show the same pattern of growth, however. The data suggest an important interaction between medieval political institutions and access to the Atlantic: the more rapid economic growth took place in societies with relatively nonabsolutist initial institutions, most notably in Britain and the Netherlands. In contrast, countries where the monarchy was highly absolutist, such as Spain and Portugal, experienced only limited growth in the subsequent centuries, while areas lacking easy access to the Atlantic, even such nonabso- lutist states as Venice and Genoa, did not expe- rience any direct or indirect benefits from Atlantic trade. Figures 1 and 2 illustrate the central thesis of this paper. Figure 1, panel A, shows that urbanization in Western Europe grew sig- nificantly faster than in Eastern Europe after 1500.2 Figure 1, panel B, shows that these 2 For the purposes of this paper, Western Europe is taken to be all the countries west of the Elbe, i.e., Austria, FIGURE 1A. WESTERN EUROPE, EASTERN EUROPE, AND ASIA: URBANIZATION RATES, WEIGHTED BY POPULATION, 1300–1850 FIGURE 1B. ATLANTIC TRADERS, WEST EUROPEAN COUNTRIES NOT ATLANTIC TRADERS, AND EASTERN EUROPE: URBANIZATION RATES, WEIGHTED BY POPULATION, 1300–1850 547VOL. 95 NO. 3 ACEMOGLU ET AL.: THE RISE OF EUROPE differential trends are due in large part to the growth of Atlantic traders. The rest of West- ern Europe had a relatively high average urban- ization rate of 10 percent in 1300 (and 11.4 percent in 1500), but grew at approximately the same rate as Eastern Europe from 1500 to 1850, by a factor of less than 2, to reach 17 percent by 1850. In contrast, Atlantic traders started with a lower average urbanization rate of 8 percent in 1300 (and only 10.1 percent in 1500), which almost tripled in the subsequent 550 years to reach 24.5 percent in 1850, overtaking average urbanization in the non-Atlantic parts of West- ern Europe between 1600 and 1700 (see Table 1). Panels A and B in Figure 2 show the same pattern, using Angus Maddison’s (2001) esti- mates of GDP per capita. While GDP per capita rose by a factor of almost two among Atlantic traders between 1500 and 1820, in the rest of Western Europe it grew at approximately the same rate as in Eastern Europe, just under 30 percent. The patterns depicted in Figures 1 and 2 do Belgium, Britain, Denmark, Finland, France, Germany, Ire- land, Italy, the Netherlands, Norway, Portugal, Spain, Swe- den, and Switzerland. Eastern Europe is all European countries to the east of the Elbe, including Russia and excluding Turkey. See Section I A for details on urbaniza- tion and GDP data. All averages are weighted by popula- tion, using numbers from Colin McEvedy and Richard Jones (1978). FIGURE 2B. ATLANTIC TRADERS, WEST EUROPEAN COUNTRIES NOT ATLANTIC TRADERS, AND EASTERN EUROPE: GDP PER CAPITA, WEIGHTED BY POPULATION, 1500–1870 FIGURE 2A. WESTERN EUROPE, EASTERN EUROPE, AND ASIA: GDP PER CAPITA, WEIGHTED BY POPULATION, 1500–1870 548 THE AMERICAN ECONOMIC REVIEW JUNE 2005 not simply reflect the tendency of more suc- cessful nations to engage in Atlantic trade. There is no differential growth of Atlantic traders before the opening of Atlantic sea routes, and below we show similar results using an exogenous measure of access to the Atlantic—ratio of Atlantic coastline to land area—instead of the distinction between At- lantic traders and nontraders. Nor do the re- sults reflect some post-1500 advantage of coastal nations: Atlantic ports grew much faster than other European cities, while Med- iterranean ports grew at similar rates to inland cities. This evidence weighs against the most pop- ular theories for the rise of Europe, which em- phasize the continuity between pre-1500 and post-1500 growth and the importance of certain distinctive European characteristics, such as culture, religion, geography, and features of the TABLE 1—DESCRIPTIVE STATISTICS Whole sample, unweighted Whole sample, weighted Atlantic Western Europe Non- Atlantic Western Europe Eastern Europe Asia Weighted by population Urbanization in 1300 6.6 9.9 8.0 10.0 4.1 11.0 (5.2) (3.2) (2.8) (6.1) (3.3) (0.7) Urbanization in 1400 7.6 10.3 8.5 12.1 3.9 11.1 (9.5) (3.6) (2.4) (10.0) (1.5) (0.5) Urbanization in 1500 8.3 10.6 10.1 11.4 4.0 11.5 (7.6) (3.4) (5.3) (6.8) (1.8) (0.7) Urbanization in 1600 9.6 11.7 13.6 14.0 4.4 12.0 (7.6) (4.0) (7.6) (8.8) (2.7) (0.7) Urbanization in 1700 10.7 11.2 14.5 13.1 3.7 11.6 (8.5) (4.1) (6.8) (8.1) (2.2) (0.7) Urbanization in 1800 14.1 10.3 19.8 16.9 7.0 8.9 (9.1) (4.9) (7.9) (7.5) (3.3) (1.4) GDP per capita in 1500 627.54 608.3 721.46 850.73 506.94 575.0 (159.3) (118.0) (31.1) (217.1) (78.2) (35.4) GDP per capita in 1600 740.73 630.5 916.31 908.22 578.29 576.8 (225.6) (144.2) (149.3) (167.3) (112.3) (35.3) GDP per capita in 1700 862.12 622.2 1079.21 980.82 636.0 574.2 (348.4) (208.1) (321.4) (128.2) (136.1) (35.3) GDP per capita in 1820 988.00 691.7 1321.95 1095.40 719.5 575.5 (373.6) (264.5) (348.7) (125.3) (174.9) (45.7) Constraint on executive in 1500 1.67 1.73 1.75 1.99 1.46 (0.76) (0.79) (0.56) (0.99) (0.79) Constraint on executive in 1600 1.67 1.53 1.62 1.54 1.45 (1.01) (0.84) (1.24) (0.59) (0.79) Constraint on executive in 1700 1.83 1.52 1.83 1.41 1.30 (1.31) (1.17) (1.76) (0.94) (0.76) Constraint on executive in 1800 2.25 2.18 4.00 1.90 1.00 (1.82) (1.83) (1.79) (1.78) (0.00) Atlantic coastline-to-area 0.0057 0.0014 0.0118 0.0026 0.00 0.00 (0.0117) (0.0065) (0.0181) (0.0052) Notes: First column is unweighted means; other columns are mean values weighted by total population in year indicated, from McEvedy and Jones (1978). Standard deviation is in parentheses. There are 24 European countries in these data. Atlantic Western Europe is England, France, the Netherlands, Portugal, and Spain. Non-Atlantic Western Europe is Austria, Belgium, Denmark, Finland, Germany, Ireland, Italy, Norway, Sweden, and Switzerland. Eastern Europe is Albania, Bulgaria, the Czech Republic, Greece, Hungary, Poland, Romania, Russia, and Serbia. Asia is India and China. Urbanization for Europe is percentage of population living in towns with population of at least 5,000 at some time between 800 and 1800, from Paul Bairoch et al. (1988) for Europe; comparable data for Asia are from Bairoch (1998). GDP per capita is from Maddison (2001). Constraint on executive is on a scale of 1 to 7, where a higher score indicates more constraints; this is coded using the Polity IV methodology, as explained in the text. We have not coded constraint on the executive for Asia. Atlantic coast-to-area includes those parts of Germany, Denmark, and Norway that are on the North Sea. For more detailed definitions and sources, see Appendix, Table 1. 549VOL. 95 NO. 3 ACEMOGLU ET AL.: THE RISE OF EUROPE European state system.3 Instead, it is consistent with theories that emphasize the importance of profits made in Atlantic trade, colonialism, and slavery.4 Nevertheless, other evidence suggests that overseas trade and the associated profits were not large enough to be directly responsible for the process of growth in Europe. Stanley L. Engerman (1972) and Patrick K. O’Brien (1982) demonstrate that the contribution of profits from slavery and trade with the rest of the world to European capital accumulation was modest. O’Brien (1982, p. 2) writes that trans- oceanic trade “... could in no way be classified as decisive for economic growth of Western Europe.” Although recent work by Joseph E. Inikori (2002) estimates larger trade flows than those of O’Brien, his estimates are not large enough to suggest that European growth was driven solely by the direct impact of Atlantic trade on profits or resources. We advance the hypothesis that West Euro- pean growth during this period resulted, in part, from the indirect effects of international trade on institutional development. Although there were some improvements in economic institu- tions in the late medieval and early modern period, rapid economic development did not begin until the emergence of political institu- tions providing secure property rights to a broader segment of society and allowing free entry into profitable businesses (Douglass C. North and Robert P. Thomas, 1973; North and Barry R. Weingast, 1989). The critical political institutions were those that constrained the power of the monarchy and allied groups.5 Checks on royal power and prerogatives emerged only when groups that favored them, that is commercial interests outside the royal circle, became sufficiently powerful politically. From 1500, and especially from 1600, onward, in countries with nonabsolutist initial institu- tions and easy access to the Atlantic, the rise in Atlantic trade enriched and strengthened com- mercial interests outside the royal circle and enabled them to demand and obtain the institu- tional changes necessary for economic growth. Although profits from Atlantic trade were small relative to GDP, they were still substantial, and much larger than previous trading profits. For example, Figure 3 shows that by the end of the seventeenth century, the volume of Atlantic trade was much larger than that of long-distance Mediterranean trade (see the Appendix for the construction of these series). The recipients of these profits became very rich by the standards of seventeenth- and eighteenth-century Europe, and typically politically and socially very powerful. These changes did not take place in countries with highly absolutist institutions such as Spain, 3 See, e.g., Max Weber (1905), Eric Jones (1981), John A. Hall (1985), and David S. Landes (1998). 4 E.g., Eric E. Williams (1944), Andre Gunder Frank (1978), and Immanuel M. Wallerstein (1974–1980). 5 It is important to note that these new political institu- tions neither protected the rights of all citizens nor were democratic. They can best be characterized as oligarchic, since they increased the political power of wealthy mer- chants, and at least in the British case, of the gentry and nascent industrial interests. Nevertheless, they constituted a distinct improvement over the previous set of institutions, which placed many fewer checks on the power of the monarchy. FIGURE 3. VOLUME OF ATLANTIC AND MEDITERRANEAN TRADE (VOYAGE EQUIVALENTS PER YEAR), 1300–1800 550 THE AMERICAN ECONOMIC REVIEW JUNE 2005 Portugal, and to a large extent France, where the crown was able to closely control the expansion of trade. Consequently, in these countries, it was the monarchy and groups allied with it that were the main beneficiaries of the early profits from Atlan- tic trade and plunder, and groups favoring changes in political institutions did not become powerful enough to induce them. Our hypothesis, therefore, predicts an important interaction between initial institutions and Atlantic trade, which is the pattern we find in the data. The major premise presented in this paper is consistent with the emphasis of a number of historians, including, among others, Ralph Davis (1973a), Jan de Vries (1984), Paul Bairoch (1988), Fernand Braudel (1992), and de Vries and Ad van der Woude (1997). Although this historical literature emphasizes the differ- ential growth of Atlantic ports and Atlantic na- tions, to the best of our knowledge, there are no other studies documenting the quantitative im- portance of Atlantic traders and Atlantic ports, or showing that the differential growth of West- ern Europe is accounted for largely by the growth of Atlantic traders. On the theoretical side, our hypothesis builds on the notion that institutional change, even when socially beneficial, will be resisted by social groups that stand to lose economic rents or political power. Consequently, the process of institutional change involves significant conflict between different groups—in the European context, between the monarchy and its allies, versus commercial interests outside the royal circle.6 Our historical account can also be viewed as a marriage between the Marxist thesis linking the rise of the bourgeoisie and the de- velopment of the world economy (e.g., among others, Williams, 1944; Frank, 1978; and Wallerstein, 1974–1980) and the neoclassical emphasis on the development of political insti- tutions and secure property rights in Western Europe (e.g., North and Thomas, 1973; Eric L. Jones, 1981; North, 1981; J. Bradford De Long and Andrei Shleifer, 1993). Distinct from these approaches, however, we offer an explanation, based on the interaction between Atlantic trade and medieval political institutions, of why strong private property rights emerged in West- ern Europe, especially in Britain and the Neth- erlands, starting in the sixteenth century. Although some scholars have noted the impor- tant role of overseas merchants in particular instances of political change during this period (most notably Robert Brenner, 2003, and Steven Pincus, 2002, in the British case), we are not aware of a theory along the lines developed in this paper. The paper is organized as follows. Section I documents the key premise of the paper, and shows that the pattern seen in Figures 1 and 2 is robust. Section II develops our hypothesis for the rise of Europe and the role played by At- lantic trade in this process, and provides histor- ical evidence supporting our interpretation. Sections III and IV provide evidence on some implications of our hypothesis (Section III shows that the evolution of European institu- tions is closely linked to Atlantic trade, and Section IV documents an important interaction between initial institutions and Atlantic trade in European economic growth). Section V con- cludes. The Appendix summarizes the construc- tion of the variables used in the empirical analysis, and further detail can be found in Acemoglu et al. (2002b). I. Atlantic Trade and the Rise of Europe A. Data We use three data series to measure economic development. First, we construct estimates of urbanization based on the urban population numbers of Bairoch et al. (1988). This is a comprehensive dataset with information on all 2,200 European cities that had, at some time between 800 and 1800, 5,000 or more inhabit- ants.7 We use these data as our measure of urban population and divide by the population6 See, for example, North (1981), Mancur Olson (1982), Per Krusell and Jose-Victor Rios-Rull (1996), Stephen Par- ente and Edward C. Prescott (1999), Acemoglu and Robin- son (2000, 2002), and Raghuram G. Rajan and Luigi Zingales (2003). Ronald Rogowski (1989) is particularly notable in this context, since he also emphasizes how trade affects political coalitions via its impact on factor prices, although he does not focus on how trade might induce institutional change by strengthening commercial interests. 7 These data begin in 800, and there are estimates for every 100 years until 1700, then for every 50 years through 1850. Bairoch et al. (1988) emphasize, however, that esti- mates before 1300 are rough and less reliable (and they skip the year 1100 due to lack of information). These data were used previously by De Long and Shleifer (1993). 551VOL. 95 NO. 3 ACEMOGLU ET AL.: THE RISE OF EUROPE estimates of McEvedy and Jones (1978) to cal- culate urbanization (percentage of the popula- tion living in cities with more than 5,000 inhabitants). We also use estimates of urbaniza- tion rates for Asia from the quantitative and qualitative assessm