Organizations, Civil Society, and the Roots of Development

Naomi R. Lamoreaux, John Joseph Wallis, Naomi R. Lamoreaux, John Joseph Wallis

• Publisher: University of Chicago Press
• Year: 2017
• ISBN:
  9780226426532
• Topic: Business
• Subtopic: Business General
• Index: Business

Modern developed nations are rich and politically stable in part because their citizens are free to form organizations and have access to the relevant legal resources. Yet in spite of the advantages of open access to civil organizations, it is estimated that eighty percent of people live in countries that do not allow unfettered access. Why have some countries disallow the formation of organizations as part of their economic and political system?The contributions to Organizations, Civil Society, and the Roots of Development seek to answer this question through an exploration of how developing nations throughout the eighteenth and nineteenth centuries, including the United States, United Kingdom, France, and Germany, made the transition to allowing their citizens the right to form organizations. The transition, contributors show, was not an easy one. Neither political changes brought about by revolution nor subsequent economic growth led directly to open access. In fact, initial patterns of change were in the opposite direction, as political coalitions restricted access to specific organizations for the purpose of maintaining political control. Ultimately, however, it became clear that these restrictions threatened the foundation of social and political order. Tracing the path of these modern civil societies, Organizations, Civil Society, and the Roots of Development is an invaluable contribution to all interested in today's developing countries and the challenges they face in developing this organizational capacity.

1

The East Indian Monopoly and the Transition from Limited Access in England, 1600–1813

Dan Bogart

History shows that many important markets are limited by laws and customs enforced by political and religious authorities. Examples are bans on trade, prohibitions on migration, and grants of monopoly. The result in all cases is that favored individuals and firms earn “rents,” or an excess payment over and above the amount expected in open markets. Introductory economics suggests that limiting markets generally reduces social welfare and hampers development by lowering incentives for innovation.

The importance of limited markets has led to much theorizing and analysis. North, Wallis, and Weingast (2009) is an important recent work tackling this issue. They argue that most societies in human history can be described as “limited-access orders,” where the ruling coalition limits entry to markets and the political system. The resulting rents give elites in the ruling coalition an economic incentive to support the regime rather than undermine it through violence or other means. Some limited-access orders can be fragile, such that commitments to elites are fluid and unstable. Shocks can easily lead to violence and the creation of a new coalition. There are alternative systems called “open-access orders.” In these societies, governing coalitions do not limit entry to markets and the political system. Instead, social stability is sustained through political and economic competition. Open-access orders are also capable of sustained development above and beyond what is possible in limited access. The interesting question then is why don’t all societies transition from limited- to open-access orders?

Providing a satisfactory answer to this question is extremely difficult. The approach taken by North, Wallis, and Weingast (2009) is to use history to illuminate the transition. They propose three doorstep conditions in the transition from limited to open access: the rule of law for elites (doorstep 1), the existence of perpetually lived organizations (doorstep 2), and consolidated political control of the military (doorstep 3). Rule of law for elites is achieved when law is applied equally to all elites and is enforced without bias. In such settings, elite-owned assets and organizations are protected from predation even when the ruling coalition changes. Perpetually lived organizations are those whose existence does not require the sanction of the governing coalition. Companies formed under general incorporation law are good examples of perpetually lived organizations, but there are many other examples in the public and religious spheres.

This chapter studies the English East India Company, with the aim of understanding how the doorstep conditions were met in England. The English Company is notable in the broader literature because it paved the way for Britain’s colonization of India starting in the mid-eighteenth century.¹ But for more than a century prior, it was a privileged company with a monopoly over all trade between England and Asia. The East India monopoly is an excellent example of limited access. The Company gave the monarch added tax revenues through special customs duties and a share of the prizes from captured ships. It also provided defense against other European nations in Asia. In return, the Company got the right to earn profits from its monopoly privileges. This partnership was made explicit by the original charter in 1600 and those that followed.

The English Company’s monopoly lasted several centuries, but it was far from secure, especially before the early eighteenth century. The government (at first the monarchy and then parliament) authorized groups known as interlopers to trade in East Indian markets, which violated the terms and spirit of the Company’s monopoly. The government also forced the Company to lend money and demanded extra payments. As I argue below, political instability and fiscal incapacity were the root causes of the insecurity. The Company usually had political connections to the government to strengthen its privileges, but these were less effective or counterproductive when politics became unstable, as often happened in the seventeenth century. The government was also desperate for loans and taxes, usually in times of war, and thus it could not commit to allow the Company to earn profits in accordance with its charter and agreement.

Remarkably, the East Indian monopoly became more secure by the mid-eighteenth century. Previously, the Company’s trading privileges were renegotiated according to the dictates of politics and finance. But after 1744, the monopoly was renegotiated only when the terms of the previous charter expired. Thus an important step was taken toward the rule of law for elites. The achievement of political stability under the early Hanoverian monarchs (1715–1760) and the greater capability of Britain’s fiscal system were some of the key factors behind this step.

Despite these developments Britain had not yet reached the second doorstep condition, in which most organizations operate without sanction from the governing coalition. From 1781 to 1813, the monarch and parliament continued to renew the Company’s trading privileges for terms of ten or twenty years despite pressures to end them. Key reasons were the Company’s strong political connections and its value in defending India against the French. British governments were also keen to preserve the monopoly because the Company earned vast new revenues following the Battle of Plassey and its takeover of tax collection rights in Bengal in the 1760s.

A huge step toward open access was taken in the 1813 charter act. In this act, the Company lost its monopoly over trade with India. From that point forward, private traders could enter the Indian market with few restrictions. The opening of Indian market access was due to several factors. First, manufacturers in the north of England, whose economic interests went against the Company’s monopoly, became more influential by 1813. Lord Liverpool’s “Liberal Tory” government believed it was necessary to accommodate the growing manufacturing interest and end the monopoly. Second, a random event played a related role. In May of 1812 the Prime Minister Perceval was assassinated. In the election that followed the Company’s connections to the governing party in the Commons were much weaker than in previous years, and it could not defend itself against opponents. The timing was bad for the Company because its charter was up for renegotiation in the winter of 1813. Third, the fiscal value of the Indian monopoly diminished as the customs revenues from Indian trade fell in the early 1800s. Notably customs revenues in the lucrative Chinese tea trade rose sharply in the early 1800s, and partly for this reason the Chinese monopoly was kept intact until 1833.

This chapter contributes to a broader understanding of the transition from limited to open-access orders.² It also contributes to the literature on the evolution of markets and British institutions.³ The history of the Company suggests there was no moment when the rule of law for elites and open markets emerged in Britain. In particular there was no dramatic shift to open access following constitutional reforms, like the Glorious Revolution. The gradual building of political stability and fiscal capacity by the mid-eighteenth century were the key processes leading to the rule of law. The growth of northern manufacturing interests in the late eighteenth century was also significant in bringing the monopoly to the end. The last finding raises more general questions about the relationship between the transition to open access and economic growth. It is not clear which caused the other. The conclusion returns to these broader themes.

1.1 The Origins of Monopoly in the East Indian Trade

The East India Company was founded in 1600 through a charter granted by Queen Elizabeth. Management was in the hands of a governor and a board of directors. Shareholders with a minimum number of shares elected the governor and directors. The Company was given a monopoly over all trade and traffic from the Cape of Good Hope to the Straits ...