Nora Srzentić

Key Aspects of the New Institutional Economics (NIE)

This chapter will provide a background on the recent literature focusing on institutions as a factor behind economic success of countries, not only looking back in history but also in current policy discussions about sustained growth in developing countries, the recent post-communist transition, and also the current slow-growth problems of advanced countries like the US and Europe. Adducing the importance of good institutions goes well beyond the economic literature, and has become commonplace in other social sciences: political studies, sociology, and history. We will focus primarily on the work of economists, though many writings follow a political economy approach and sometimes overlap with other disciplines. This chapter does not purport to do a comprehensive survey of this literature, but only highlights its main points to give a selective resume of those aspects of the NIE most relevant to this book.1

Economic Evolution and Rise to Prosperity

There is virtually no disagreement in the literature that the apogee of Ragusa’s economic prosperity came in the 15th and 16th centuries, oft-called the “golden years of maritime prosperity” after which its role in the region began to decline. This period coincided with both the Hungarian and Ottoman suzerainties. But a closer reading yields some puzzles concerning an apparently very dynamic period before the golden years, and continued prosperity well beyond 1600. To clarify some of these puzzles, this chapter will first propose a new periodicity for Ragusan history based on the nature of its economic activity rather than the traditional historico-diplomatic criteria of Chapter 3, and describe for each of these periods the main aspects of economic development. Next, we will provide an illustration of the real-life process of economic development by telling a few stories of key individuals — both nobles and commoners — who exemplified the day-to-day operations in governance, diplomacy, shipbuilding, navigation, and commerce. The last section will propose a series of hypotheses about economic evolution derived from the historical and economic review given in Chapters 3 and 4. These hypotheses are formulated in such a way as to be potentially testable with quantitative data, setting the stage for the statistical analyses in the rest of the book.

Macro Policies 1: Fiscal Probity: The Starting Point for Good Institutions (and the Other Way Around?)

There is a very strong consensus in the literature that Ragusa practiced a very prudent policy with respect to state finances, minting and debasement of the currency as well as market-enhancing regulations. Chapter 2 noted that all modern-day proponents of institutionalism, no matter how critical they may be of “too-early and too rapid” liberalization, do accept the Washington Consensus’ emphasis on starting with fiscal stabilization and maintaining fiscal prudence. All agree that reckless public finance diminishes private investments and destroys commercial efforts. This consensus thus implicitly answers the question in the title: yes, fiscal probity must come first, but yes it becomes part of a virtuous circle; fiscal probity and good institutions are interdependent and both together mirror sensible policies.

The System of Governance, Wise Policies, and Market-Friendly Institutions

There appears to be a strong consensus in the historical literature that Ragusa was indeed economically very successful in these centuries, rivalling or at least approaching the prosperity of much larger Italian city-states like Venice, Florence, Bari, and Ancona. This is manifested in measures of the wealth of its elite and the apparent wide extent of its trading activities, and is confirmed by data on the size of its shipping fleet which until 1600 was in the same league as top maritime powers like Venice, England, and the Netherlands. While on these facts there is little dispute, what makes the literature interesting is differences about what explains its success: how could such a tiny entity do so well? The Carter’s book (1972, p. 550) is typical in its aim to show “how a small republic with few natural advantages could grow and develop mainly through her function as a trade and political intermediary between the underdeveloped regions of the Balkans and Levant, and the more developed regions of western Europe.”

Institutions Friendly to Commerce: In Today’s Jargon, “Ease of Doing Business”

The widely cited annual publication of the World Bank, The Doing Business Report, today stands as the standard reference for both the practical methodology and actual measurement of the degree to which a country’s market-related institutions are friendly to doing business. Since the mid-1990s it has developed quantitative indicators of the “ease of doing business” (EDB) using both direct objective measures such as number of days to register a new business, plus subjective assessments by many economic agents on how fair laws and courts are to small business compared to large ones, and so on. Such indicators are not available for earlier periods of course, and so far economic historians have not undertaken efforts to compile analogous data for earlier centuries, due to severe data limitations. However, we have been able to utilize the broad concepts of such indicators to cull from the secondary literature — as done in Part II of the book for economic activity proxies — a surprisingly large amount of quantitative measures related to legal procedures. In this chapter we provide a limited but indicative set of data on contract enforcement and bankruptcy procedures in Ragusa, while Chapter 11 does this for the coverage, speed, and effectiveness of both civil and commercial court procedures. The rest of the chapter first covers the contract enforcement date, then gives a more qualitative view of the favourable business climate as far back as the 13th century, and finally discusses some writings of the time that reflect very sophisticated intellectual views of entrepreneurship, theoretical concepts of the interest rate, and a deep understanding of what the NIE literature today contends: “good institutions matter for promoting economic growth and prosperity.”

The History of Ragusa in an Eastern Mediterranean Context

The historical literature on Ragusa exhibits a considerable consensus that despite its small size and limited natural resources, it was one of the most successful states in the eastern Mediterranean, with volumes of shipping and trade, levels of wealth, and architectural and cultural achievements comparable to the major centres of the region. Innumerable authors over the centuries have attributed its success to effective governance based on a political regime of republicanism that may not have been democratic but relatively fair and benevolent providing pioneering social provisions like education, health care, quarantine systems, and grain reserves for times of shortage. To this was coupled a generally liberal, open economy, with prudent state finances, limited market intervention, and encouragement of private enterprise. Is this rosy view of Ragusa truly justified? We ask this question in the book and try to answer it by using the new methodologies of cliometrics, testing hypotheses of historians with as much hard data as possible.

An Open Legal System with Effective Rule-of-Law

That the rule-of-law (ROL) is one of the important institutional elements in promoting economic growth is widely agreed, but defining ROL concisely leads to many variations and disagreements. It is beyond our scope to attempt to resolve these differences, but for clarity we propose to set out one such definition from the World Justice Project which appears most useful as a framework relevant to the central thesis of our book concerning the early existence of “good” institutions favourable to commerce and social harmony in Ragusa.1

Macro Policies 2: Monetary and Financial Prudence, Minimal Public Debt

Similar to fiscal policy, the historical literature gives a very positive assessment of monetary and currency policy with minimal metallic debasement. Noting consequently low inflation, together with the fiscal prudence discussed in the previous chapter, such credible monetary policy and stable currency, plus sufficient credit availability to fuel commerce, provided in Mediaeval Ragusa the now-traditional pillars of trade expansion and economic development.

The Relative Decline after Vasco da Gama Circumnavigation

Most historians agree not only on the peak of Ragusa’s economic glory days coming in the second half of the 16th century1, but also on the long-term causes of the decline: a shift of economic dynamism to Western Europe (Portugal, Spain, the Netherlands, England, France), and the related the opening of the Cape of Good Hope route to Eastern markets. The gradual decline is reflected in values for population (Figure 5.1), GDP per capita (Figure 5.2), number and capacity of ships (Figure 5.3 and Figure 5.4). This affected not only Ragusa, but the Italian city-states as well, and for Venice as we see in some of the same figures, in particular on shipping activity. For Venice, Lane (1973, pp. 384–386) refers to this as “The Collapse.” Our quantitative evidence does not contradict the existence of a relative decline. The data suggest that this decline was not an immediate one. Indeed, during the early development of western fleets’ trading in the East, after Vasco da Gama had established a colony in India in 1503, and the first spices had been brought to Europe by Portuguese ships in 1506, it is clear from Figures 5.3 and 5.4 that Ragusan shipping capacity continued to expand for 70 some years. Actually, Carter (1972)2 and Lane (1933)3 both claim that Venice and Ragusa recovered their Levantine trade after the initial shock of the Portuguese entry.

“Sufficient” Social Fairness Provides Stability

It has become commonplace today to worry that excessive social inequity or even just perceptions thereof can reduce economic growth prospects through social discontent and instability. The popularity of work by Thomas Piketty goes well beyond the academic community in clarifying and raising awareness of this issue. For our purposes, whether like Ogilvie (2011) above, one considers income distribution and social support mechanisms as institutions or not, the effect on growth is analogous. We examine in this chapter how this modern-day issue played out in Mediaeval Ragusa, to what extent its economic success was also due to a wise policy of ensuring social well-being sufficient to ensure a high degree of stability, which in turn contributed to thriving economic activity. We begin in with the arguments by many historians and political scientists that indeed such social stability was achieved and that it was due to a relatively benevolent stance by the patricians towards not only rich merchants but also the low-income strata of Ragusa. The following section lists in detail the many different actions and policies of such a benevolent social programme, and then we attempt to delve deeper into the question of why the nobility were seemingly more benevolent than their counterparts in most other states. We summarize briefly in the final section.