American wealth and the fall of Spain

Spain was a leading European power in the 1500’s. But by the end of the 16th century its economic growth had slowed down, leading to a permanent decline and then falling behind Western Europe (Prados de la Escosura et al. 2020). Although it has been known for some time that “there is a great deal of evidence pointing to the decline of animal husbandry, agriculture, industry and trade in seventeenth-century Spain” (Vives 2015: 411), there is currently no consensus in the literature on the underlying cause of Spain’s decline.

In a recent study (Charotti et al. 2022) we argue that the root cause of the Iberian decline is America, in contrast to many English language literatures, which attribute the fall of Iberia to the primary institution, weak state power or religion (Henriques and Palma 2019) – economically and scientifically. There was a wealth curse associated with the precious metal resources on the continent. From an economic point of view, the advent of metals makes trading industries less competitive as inflation leads to appreciation of the actual exchange rate. As a result, imports have increased and exports have fallen sharply (Drelichman 2005). In addition, there was a political influence: as power became more autocratic, institutions deteriorated and the state was captured by foreign interests and internal lobbies (Vives 2015, Drelichman 2007). Although previous research has covered various aspects of resource curse in early modern Spain, no modern empirical assessment of long-term adversity has previously been available. This is what we do in our paper.

We rely on data from macroeconomic time series from recent developments in historical national account literature. The data contains estimates of GDP and price-levels based on detailed information on the market value of goods, wages and land rents collected from various sources on an annual frequency. We combine a series of three centuries span from various Western European countries, especially Spain (Alvarez-Nogal and Prados de La Escosura 2013), UK (Broadberry et al. 2015), France (Ridolfi and Nuvolari 2021), Italy (Malanima 2011). I do. ), And Sweden (Krantz 2017).

We use augmented artificial control methods to analyze the impact of American money flows (see Abadi 2021 and Ben-Michael et al. 2021 discussion). More specifically, we create a ‘Doppelganger’ that, for the post-treatment period, could be interpreted as the expected course of the Spanish economy if the country were not the first receiver of these precious metals. This synthetic counterfactuality is assumed to be a variable weighted average for each result of interest for other Western European countries, the weights being determined by the pre-treatment analogy.

In the Figure 1 panel (a), the series presented by the bold solid line shows the actual evolution of the price level (measured in silver units) for the Spanish economy, while the light dashed line shows the approximate synthetic counterfactual. Accordingly, the difference or gap between real and synthetic Spain represents the effect of treatment, as illustrated in panel (b). Our research highlights that, compared to a synthetic counterfeit, the price level in Spain increased by 200% by the middle of the 17th century.

Figure 1 Spacing and Silver Price Level (Index 1500 = 100)

Comments: We have used ridge augmented synthetic control method. (a) The shaded area in the figure is an ideal deviation of the difference between the result of interest during the pre-treatment period and the estimated adversity. In Figure (b) the difference between the price level indicator and the price level indicator is defined as the difference between the observed and the approximate counterfactual.

In terms of GDP per capita, as shown in Figure 2, Spain has surpassed other European countries for almost a century: by 1600, it was close to 40% of its counterfactual. However, over the next 150 years this effect was reversed: by 1750, per capita GDP would have been 40% lower if Spain had not received the first wave of American wealth.

Figure 2 1990 GK per capita gap and GDP (index 1500 = 100)

Comments: We have used ridge augmented synthetic control method. (a) The shaded area in the figure is an ideal deviation of the difference between the result of interest during the pre-treatment period and the estimated adversity. Figure (b) defines the GDP per capita as the difference between the per capita GDP index and the estimated counterfeitual.

We argue that the process behind the patterns observed in Spain was a wealth curse, which had both economic (‘Dutch disease’) and political dimensions (Henriques and Palma 2019). Our results also highlight the fact that financial forces can have long-term distributive and lasting consequences.


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