Luck, Human Agency, and Micro Institutions in Colonial Brazil Fernando Zanella United Arab Emirates University Dept. of Economics and Finance P. O. Box 17555 United Arab Emirates [email protected] and Christopher Westley Jacksonville State University Dept. of Finance, Economics, and Accounting 700 Pelham Road, North Jacksonville, Alabama 36265 [email protected] Abstract Institutions, in a broad sense, are widely recognized as determinants of economic growth. However, individual behavior and micro institutions are sometimes overlooked by institutional economists in their search for broad patterns. At times, such outcomes are a weak reductionism of truly complex phenomena. Historians do pay more attention to individuals and historical idiosyncrasies, but not necessarily they master the economic tools. This paper explains the success of Brazilians’ earlier settlements as a mix of accident and design— a combination that greatly impacted trade, the conquest of the West, the definition of property rights and economic growth. By doing so, it stresses the limitations of applying an aggregate institutional interpretation of economic history and development. This paper applies the principal-agent model and its main feature, i.e., risk-sharing—an extreme case where the settlers and natives were risking their own lives while the Portuguese was seeking to reduce risks and transaction costs to maintain its Empire. Portuguese agents were extensively used to reduce uncertainties, to cut deals with the natives to secure settlements, to combat the Frenchmen, and to boost trade. JEL: B, N, O Key Words : Institutions ; Brazil Colonial ; Principal-Agent ; Settlers 1. Introduction Brazil’s first settlement, San Vicente, was led by Martin Alfonso de Souza, who received a land grant from the Crown called captaincy. Three days after the Portuguese arrived on the Brazilian coast, they were prepared to fight a large group of approaching natives. Instead, a naked man came from the natives’ side and introduced himself. He was a Portuguese man, João Ramalho, who had been living there for 20 years after his ship sank in 1512. He was accepted by the local Indians, the Tibiriçás, and married the chief’s daughter. He told the Portuguese that he could keep the peace under certain conditions, including informal rules on property rights. As a result, San Vicente became the most successful settlement; it was in the area of today’s Sao Paulo, the richest state in Brazil. The Captaincy of San Vicente became a successful settlement because of an historical accident—an outcast living among the natives who acted as a broker to avoid war, to established a basic set of informal rules, and to boost trade. Further north, not by accident but by Portuguese design, another settlement was also successful in establishing peaceful and trade-heavy relationships with some tribes. The captaincy was owned by Duarte Coelho, who arrived in 1535. He fought several battles against the natives and his captaincy was a little more than a fort. Again, a Portuguese living among the natives, Vasco Fernandes Lucena, acted as a broker between the parties. Unlike the situation of João Ramalho, his life among the natives was not pure accident. Lucena was one of dozens of degredados dropped off on Brazilian shores several years earlier by Portuguese ships. Degredados were convicted in Portugal—usually for political and religious reasons—and had their convictions waived in exchange for a chance to learn the language and customs of the natives of the new world. However, they often ended up cannibalized. The Portuguese typically expected them to act as agents for the their eventual arrival. Vasco Fernandes Lucena was one of the successful survivors. Institutions, in a broad sense, are widely recognized as determinants of economic growth. However, individual behavior and micro institutions are sometimes overlooked by institutional economists in their search for broad patterns. At times, such outcomes are a weak reductionism of truly complex phenomena. Historians do pay more attention to individuals and historical idiosyncrasies, but not necessarily they master the economic tools. The objective of this paper is to explain the success of Brazilians’ earlier settlements as a mix of accident and design— a combination that greatly impacted trade, the conquest of the West, the definition of property rights and economic growth. By doing so, it stresses the limitations of applying an aggregate institutional interpretation of economic history and development. The article is structured as follows. Section two reviews the literature and sheds light on some methodological issues. Section three describes the earliest settlements in Brazil and the role of agents who negotiated peaceful solutions with the natives. The conclusion stresses the importance of a micro institution, i.e. the agent, to reduce risks and transaction costs during initial settlements. 2. Literature Review Institutions are largely recognized by scholars as determinants of economic development; vast differences in a nation’s economic development over time have been explained by a predominance of institutional factors, factor endowments, or some sort of combination thereof. North (1981), Ekelund & Tollison (1981), and Hayek (1982) emphasize that poor institutions lead the use of the government apparatus for rent extraction, thus hindering economic growth. Engerman & Sokoloff (2000) point out that the role of institutions may be overplayed, and that factor endowments are important to explain performance asymmetries. Demsetz (2000) suggests that factor endowments play a determinant role during the initial stages of development, while set up institutions are predominant in a second phase. Religion has long been pointed out as an important institutional factor. Protestant predominance leads to growth due to its friendly understanding of capitalism. The U.S. case is a common example. Moog (1964) states that Protestants in the U.S. were hard workers seeking wealth accumulation, while Catholic settlers in Brazil were opportunistic raiders. The legal system is an additional institutional feature that has been addressed by authors like La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1999); these scholars divide commercial law into five groups: common law, French civil law, German civil law, Scandinavian law, and socialist law. They found that countries that abide by French or socialist laws exhibit inferior government performance. Interestingly, they add a new attribute to their findings: religion predominance. La Porta et al. found that countries with a high proportion of Catholics or Muslims also exhibit inferior government performance. Recently, in an influential paper, Acemoglu, Johnson and Robinson (2001) positively associate high mortality rates faced by European colonialists with poor long-run institutions. That is, where settlers faced high mortality rates, they were more likely to set extractive institutions instead of typical wealth enhanced European ones. Somewhat related with such approach are the geographical explanations where, for instance, tropical diseases or trade distances are predominantly accounted for: distance from the equatorial line is often used as a proxy. Some examples of this line of work are Easterly & Levine (2003) and Sachs (2003). Institutional explanations, although broadly accurate, still fail to come to grips to explain such distinguished countries’ performances. For instance, despite Protestantism being considered more business-friendly, mercantilism flourished in the Catholic Italian cities of the XIV and XV century. In fact, several naval expeditions were financed by merchants of Florence, including some to the Brazilian coast. Moreover, even among Catholic nations, differences are substantial. Jesuits in Brazil, unlike other Catholic countries, played a key role during the earlier settlements by trying to Christianize and protect natives and by creating a vast wealth in the order. Furthermore, despite the nature of the Portugal positivist legal system, the same system was systematically open to precedent—mainly the Crown’s urge to flexibly the law to use degredados overseas (Coates, 2001). Rodrik (2008) stresses that informal arrangements, or second best institutions, are overlooked when compared with formal legal systems as, for example, are the cases of Ghana and Vietnam. Additionally, as pointed out by Engerman & Sokoloff (2000) and Coastworth (1998) the Caribbean had a rich diversity of islands regardless of European colonization, i.e., legal and religious background; the Caribbean was a mixed bag of institutional features. Coastworth (2005, 2008) goes further to point out that inequality—landownership concentration—was not much different during the colonial period between Spanish and British colonies. This is an intriguing point considering that rent-seeking is associated with an unequal society and a strong extractive government. Finally, the spread of diseases were highly correlated with the slave trade (Alden & Miller, 1987). Epidemics in Brazil—e.g., smallpox and measles— coincided with outbreaks during the periods of drought and famine in West Africa, Angola and Mozambique, all slave supplier countries. Disease outbreaks mainly caused death among natives and black slaves, but also affected settlers. Brazil colonial authorities tried unsuccessfully to contain these epidemics by quarantines of arriving slaves. This fact suggests that settlers’ mortality rates were likely the result of extractive