Drelichman M. and Voth H.-J. (2008) Was Golden Age Spain cursed?

Drelichman, Mauricio and Voth, Hans-Joachim (2008) “Institutions and the Resource Curse in Early Modern Spain”, in Helpman, Elhanan; ed. Institutions and Economic Performance, Cambridge, Ma: Harvard University Press, 34p.

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This paper is available here (pdf).


During the late 16th and 17th century, the Spanish crown defaulted several times on its debts, growth was sluggish and population eventually shrank (p.4). The cause of this failure has been known for a while: the ‘resource curse’, or in other words, the “undesirable economic outcomes associated with natural resources abundance”.

The most famous of these symptoms has been called the ‘Dutch disease’. In that case, the resource-oriented sector of the economy attracts in priority the production factors, thus depleting the innovation-rich manufactory sector and making the country dependant on import, thus deteriorating the terms of trade (p.5).

But resource-rich countries are not necessarily cursed. Indeed, low institutional quality creates a vicious cycle between development and resource-based wealth (p.9). Under the Catholic Kings (1474-1516), the ‘Military Revolution’ increased the economies of scales for warfare thus favoring large polities “endowed with widespread taxing and spending abilities”.  The nobility and the cities did not represent a force to be reckoned with on a military point of view (p.11).

A dynamic of power centralization was engaged: the higher nobility was replaced on the king’s side by bureaucrats, the royal justice decidedly overshadowed lesser institutions (p.12) and, thanks to the Patronato granted by the pope, the crown took control of a large share of the Church’s wealth (p.13).

This rise to power was accompanied by the development of the Cortes, a quasi-parliamentary body designed to be the voice of the Kingdom in front of the king. This assembly had become the instrument of the urban merchant elite and their main role was to “grant their assent to new taxes or to the renewal of extraordinary ones”. In other words, it was not  dissimilar from the English parliament and associated with Castille’s manifest Atlantic destiny could well have predestined Spain to undergo a English-like institutional development attached to property rights (p.14).

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The new Church revenues had diminish the importance of the Cortes by placing new resources in the hands of the king out of their control (p.15). But the real shift occurred when the American silver started to reach Spain. By the end of the 16th century, this revenue amounted yearly to 10 millions ducats (to be compared with the 4 millions yielded over 6 years by Henry VIII of England by the sale of the confiscated Church lands).

Taxation of colonial silver imports came to represent over 25% of the crown’s revenue by the 1580s (p.17). This figure puts 16th century Spain at the level of present Mexico, Russia or Norway. “The large increase in its supply, coupled with the new sources of demand from the Far East and the expectation of future mineral discoveries prompted factors of production to be diverted from export industries […] and into the extraction and service industries”. By 1550, Castile was affected by a classic case of Dutch disease (p.20).

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One event exemplifies the total loss of control of the Cortes over the king’s actions: the revolt of the Comunidades. As the Castilian refused Charles’ demand for an exceptional tax to finance his election as Holy Roman Emperor, the king simply used the Aztec treasure to fund his venture (and subsequently crushed the rebels; p.21).

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Charles used uncollateralized short term loans (asientos) to fund his daily actions. His reputation was guaranteed by the silver imports, unsurprisingly “short term borrowing and treasure imports grew in almost complete lockstep during his reign” (p.22). After Philip II default in 1556, the system changed and the Habsburg found a new way to leverage their income using the Genoese bankers (unlike Charles who mostly relied on the German ones). After the increase of bullion import in the 1560s, Philip regained access to the international capital market.

“Short term loans were collateralized by perpetual bonds, known as juros. The bankers typically had the right to sell the bonds among the Castilian rentier class, thus effectively acting as the financial intermediaries of the Crown. Service of juros was guaranteed by existing tax revenues, while the revolving payments on short term asientos were met out of silver revenues.”

Philip could finance his expensive ventures without needing the agreement of the cortes (p.23).  There is “no doubt as to the role of American treasure in anchoring the financial system of the monarchy.” Spain thus found itself in a unique position: it could reach of outstanding debt (seven times annual revenues) unknown anywhere else before the Financial Revolution (p.24).

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As the revenues from silver decreased, the Crown asked the Cortes to compensate with taxes. The urban elites found itself in an unpleasant situation, while unfavourable to tax hikes, it also had to face the immediate costs that would represent the crumbling of Spanish venture (p.25). The latter were made clear when unpaid Spanish regiments in Flanders sacked the loyal city of Antwerp in 1575. Futhermore, the members of the Cortes were also amongst those who had the most heavily invested in the juros and thus saw taxes as a lesser evil (p.26).

Even collateralized the interest rates on the asientos were very high (above 20%, p.27). Spain thus found itself buried under a mountain of debt that severely impeded growth. Despite their attempts, the Cortes never recovered their lost influence (p.29). The sudden resource bonanza had taken medieval fiscal theory by surprise, the Cortes proved incapable to continue overseeing the Crown’s actions, as a result the country found itself a century later locked in an imperial enterprise it could no longer afford (p.30).

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