Shipwrecked by rents

Introduction

In 2011, underwater archaeologists discovered the remains of the San Jose, a galleon sunk near Lubang Island, Philippines, on July 3rd 1694. It was one of 788 galleons that traversed the route between Manila and Acapulco between 1565 and 1815 as part of the Manila Galleon trade — the longest, most profitable, and most celebrated colonial-era trade route. This paper investigates the unique case of the shipwrecks along the Manila Galleon trade route to shed new light on the relationship between monopoly rents and corruption, and the social costs they generate.

The San Jose carried a huge amount of silks and spices, over 197,000 works of Chinese and Japanese porcelain, 47 chests full of objects of worked gold, and hundreds of other chests containing precious stones and objects, the total value of which was recorded as 7,694,742 pesos or almost $450 million in today’s money. The San Jose was hardly the only galleon to have sunk over the almost 250–year long course of the Manila Galleon trade; 99 ships or 12.6% of all galleons were shipwrecked (either sunk or so heavily damaged by storms that they could not make the voyage). On the outward journey between Manila and Acapulco 20% of galleons suffered this fate. For a comparison, approximately 2.45% ships were lost in the Spanish Atlantic route that linked Mexico with Spain between 1550 and 1650. A second comparison that helps to assess the magnitude of the puzzle is the Dutch East India trade, where around 3.5% of the ships sank while traveling between the Netherlands and Asia during a similar period (1595–1795).

Why did the San Jose and so many other Manila Galleons experience a high rate of shipwreck? There are two proximate causes. First, galleons were often loaded with cargo beyond its capacity, which compromised their stability and made them more likely to capsize. The San Jose’s cargo, for instance, was three times the legal limit. Second, the galleons often departed past the official deadline, which meant that they sailed during the perilous monsoon season. These, however, beg a deeper question: Why did the galleons often exceed the safe limits imposed by law?

In this paper, we demostrate, analytically and empirically, that the monopolistic structure of the Galleon trade induced inefficient cargo loading, which led to higher-than-normal rates of shipwreck. Restrictions on the number of ships and voyages were put in place because merchants in Spain wanted to limit the number of Asian goods entering American and European markets. This meant that these goods would fetch very high prices. In exchange for transporting such valuable cargo from Manila to Acapulco, ship officials could then extract large bribes from the merchants in Manila. This induces them to violate safety limits — they either load cargo beyond the galleon’s capacity, or they depart after the sailing deadline, or both. The consequence is that the galleon faces a much greater risk of shipwreck once it starts sailing.

The Manila Galleon trade was the most lucrative single voyage in the early modern world—“the richest ships in all the oceans” (Schurz, 1939 1). The entire economy of Spain’s Philippine colony rested on the galleon trade—on the profits realized from the sale of Asian goods in Acapulco and from the silver stipend sent back on the returning ships. The best available estimates suggest that total GDP in the Spanish empire (excluding Milan and southern Italy) in 1700 was approximatively $13.016 billion (1990$) (Abad and van Zanden, 2016). Given this, a back of the envelope calculation suggests that the value of the San Jose’s cargo was equal to around 1.5% of the GDP of the entire Spanish empire. That ship officials risked overloading the ships and sailing into the monsoon season implies that the bribes were very large.

Scholars disagree whether bribes impose an additional cost in the form of queues and delays or if to the contrary, bribery “greases the wheels”. Myrdal (1968, 952) observed that in corrupt countries “often delay is deliberately contrived so as to obtain some kind of illicit gratification”. On the other hand, Lui (1985) explores the relationship between queuing and bribery and demonstrates that bribery is a form of price discrimination. Queuing can therefore be efficient if the size of the bribe is linked to the opportunity cost of the briber. A more recent approach by Grossman and Helpman, 1994, Grossman and Helpman, 2001, Bernheim and Whinston, 1986a, Bernheim and Whinston, 1986b, and Dixit et al. (1997) is to model bribe-taking as a first-price menu auction in which principals offer an agent a menu of bribes in exchange for some share or allocation of a good (see Salanié, 2005). In these models, bribes and the corresponding allocation are efficient, as “equilibrium requires that the auctioneer sell the good to the individual who values it most highly” (Bernheim and Whinston, 1986b 2).

We build on this class of models and show that the equilibrium allocation of a ship’s cargo space can in fact be inefficient. Merchants (principals) each offer bribes to a ship official (agent) in exchange for an allocation of cargo space. Ordinarily, if the value of the cargo is sufficiently low, the bribes are small, and the official does not want to risk shipwreck and loads within safe limits. Bribery and cargo loading are efficient. However, very valuable cargo – as those in the monopolistic Manila Galleon trade, induce moral hazard on the part of the agent. Because merchants can now afford to pay very large bribes, the official risks higher rates of shipwreck, and her loading effort is too much in that either the ship’s capacity is exceeded, or its departure is delayed, or both.

The model then predicts that the higher the value of the cargo, the more likely that the official exceeds the safe limits imposed by law, and the higher the probability of shipwreck. We conduct several empirical tests of this prediction using a unique new dataset of the universe of ships that sailed between Manila and Acapulco between 1565 and 1816. First, we demonstrate that there is a robust positive relationship between sailing from Manila past the official deadline and the probability of shipwreck, that is not fully explained by running into storms or typhoons, or other factors such as the experience of captains, and the age or type of ship. We also consider other explanations that might have been associated with late departures, based on our reading of the historical literature. Other factors such as the arrival date of the previous ship, the threat of pirate or enemy vessels, or the volume of Chinese merchants arriving in Manila do not affect the relationship between late departures and shipwrecks.

Second, we test whether a ship that sailed late and carried cargo that was likely beyond capacity was also more likely to end in shipwreck. We do this by comparing the relationship between a late departure and shipwreck among high–tonnage versus low–tonnage ships. All else equal, the latter would have been more likely to be overloaded when sailing late, as its physical capacity was smaller. We find that the relationship is indeed stronger for low–tonnage ships.

Third, we show that in periods when the value of the cargo would have been higher, the relationship between a late departure and shipwreck is stronger. For example, following a failed voyage — to make up for the losses, and the unmet demand for the lost goods, the value of succeeding cargo would have been higher. The value of the cargo would also have been higher when silver flows were higher, or after 1640, when the limits on the number of ships was more strictly enforced. All results indeed suggest that in periods of relatively higher value of cargo, a late departure more strongly predicts shipwreck.

We make several contributions to the literature on rent-seeking and corruption.6 First, by revealing a costly, unintended consequence, i.e. higher-than-normal rates of natural disasters like shipwrecks, the combination of monopoly rents and bribery is shown to be socially inefficient. Historians have suggested that the Manila Galleon trade was a natural monopoly, and that the sheer costs and inherent dangers involved in the voyage acted as high fixed costs that had to be offset by high profits (see Baskes, 2005). To the contrary, the monopoly regulations themselves systematically increased the risks of the voyage. Had trade been liberalized, cargo space would not have been limited, and ship officials would not have been able to extract very large bribes from them. In turn, this would have reduced moral hazard. It would have been easier for ship officials to adhere to safety limits, because when one ship would reach capacity, there would be another ship to transport the remaining cargo. Overall, each ship would carry cargo within capacity and would sail on time. There would be lower chances of shipwreck. In contrast, the monopolistic structure of the galleon trade made cargo so valuable, and moral hazard so rampant, that ship safety regulations were routinely violated. The likelihood of shipwreck was thus ‘inefficiently’ high – above what normal factors like the weather, the general condition of the ship, and the competency of crew members, could account for.

A second contribution is to measuring the costs of rent-seeking and corruption. Though a large literature has built on the insights of Tullock, 1967, Krueger, 1974, Murphy et al., 1993, and Shleifer and Vishny (1993), measuring these costs remain challenging. A survey of the empirical literature on rent-seeking concludes that “its measurement is very problematic” (Rosal, 2011 300). The costs of corruption are also difficult to measure. Novel papers have used microlevel data and causal identification in specific contexts such as the benefits of public office and political connections in Indonesia (Fisman, 2001) and India (Fisman et al., 2014); leakages from public projects in Indonesia (Olken, 2006, Olken, 2007), in Uganda (Reinikka and Svensson, 2004), in India (Niehaus and Sukhtankar, 2013); the relationship between corruption and culture (Fisman and Miguel, 2007); and extortion along trucking routes in Indonesia (Olken and Barron, 2009). In a similar, innovative spirit, we capture the social cost of corruption in the Manila Galleon trade in terms of high rates of shipwreck, and relate it to the size of monopoly rents from the trade.

Third, we provide evidence that corruption contributes to a higher rate of natural disasters. Ambraseys and Bilham (2011) find that 83% of deaths from building collapse due to earthquakes in the last 30 years occurred in corrupt countries. Nellemann and Interpol (2012) estimate that 50%–90% of the wood from developing countries are from illegal logging. Overloaded cargo resulting from bribery at airports has also been cited as a cause of many airline crashes.

We also contribute to the literature on colonial empires. The insight that colonial trading regimes were a rich source of rents to insiders, but imposed high costs on society, predates Smith (1776). Ekelund and Tollison, 1981, Ekelund and Tollison, 1997 applied these insights to the mercantilist and colonial regimes of early modern England, France, and Spain. From a macro-perspective, the long-run costs of colonial regimes has been the subject of a large literature since Acemoglu et al. (2001). But few empirical studies have examined how colonial trading regimes functioned. One exception is Alvarez-Villa and Guardado (2020) who study the immediate and long-run consequences of both legal and illegal trade. An old literature associated Spain’s colonial regime with its absolutist institutions at home (e.g. North, 1990 102-103). While recent research disputes this characterization, rent-seeking was an endemic problem as studied by Drelichman, 2005, Drelichman, 2007, Drelichman, 2009 and Charotti et al. (2022), and Spanish political institutions were not uniquely absolutist or unconstrained in the 16th and early 17th centuries (Henriques and Palma, 2019).

We offer new insights into the political economy of the Spanish colonial empire. More specifically, we analyze a most vital part of the empire – the Manila Galleon trade. The seminal historical study of the Manila Galleon trade is Schurz (1939) and subsequent scholarship relies heavily on his original archival work (e.g Legarda, 1967, Legarda, 2017, Giraldez, 2015). Historians have since stressed the extent of rent-seeking associated with this trade (Brading, 1971, Walker, 1979, Garner and Stefanou, 1993). More recently, economic historians have focused on the silver flows between the Philippines and Mexico and how this contributed to inflation in Europe (Bauzon, 1981, TePaske, 1983, Flynn and Giráldez, 1995, Alvarez, 2012, Abad and Palma, 2021). In contrast, we are the first to systematically study the trade between the ports of Manila and Acapulco, and how it generated inefficient rent-seeking and corruption.

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