《国际政治经济学》文献资料（Use of History and Sociology in International Political Economy）The Empire Effect The Determinants of Country Risk in the First Age of Globalization, 1880-1913

The Empire Effect:The Determinants of Country Risk in the First Age of Globalization,1880-1913 NIALL FERGUSON AND MORITZ SCHULARICK This article reassesses the importance of colonial status to investors before 1914 by means of multivariable regression analysis of the data available to contempo- raries.We show that British colonies were able to borrow in London at signifi- cantly lower rates of interest than noncolonies precisely because of their colonial status,which mattered more than either gold standard adherence or the sustain- ability of fiscal policies.The "empire effect"was,on average,a discount of around 100 basis points,rising to around 175 basis points for the underdevel- oped African and Asian colonies.Colonial status significantly reduced the de- fault risk perceived by investors. It was obvious to contemporaries-among them John Maynard LKeynes-that membership in the British Empire gave poor countries access to the British capital market at lower interest rates than would have been required had they been politically independent.For liberal critics of the empire,this "empire effect"seemed detrimental to the economic health of the British Isles,which might otherwise have at- tracted a higher proportion of aggregate investment.Later historians agreed that this was one of the ways in which,by the later nineteenth century,the empire had become a drain on British resources.From the point of the view of the colonies,on the other hand,the ability to raise funds in London at relatively low interest rates must surely have been a benefit-a point seldom acknowledged by critics of imperialism. But did the empire effect actually exist other than in contemporary imaginations?Recent econometric studies of financial markets before the First World War have pointed instead to the gold standard as confer- ring a "good housekeeping seal of approval,"which lowered the bor- The Journal of Economic History,Vol.66,No.2 (June 2006).The Economic History Association.All rights reserved.ISSN 0022-0507. Niall Ferguson is Laurence A.Tisch Professor of History,Harvard University,Minda de Gunzburg Center for European Studies,27 Kirkland St.,Cambridge MA 02138.E-mail: nfergus@fas.harvard.edu.Moritz Schularick is Senior Economist at Amiya Capital,London: and Visiting Lecturer,Free University Berlin;John-F.-Kennedy-Institute,Lansstr.7,14195 Berlin,Germany.E-mail:mschularick@yahoo.de. We are grateful to Nitin Malla for research assistance.We would also like to thank Michael Bordo,Michael Clemens,Warren Coats,Marc Flandreau,Carl-Ludwig Holtfrerich,Trish Kelly. Chris Meissner,Ronald Oaxaca,Thomas Pluemper,Hugh Rockoff,Martin Schueler,Irving Stone,Nathan Sussman,Alan Taylor,Adrian Tschoegl,Marc Weidenmier,and Jeffrey Williamson for comments or assistance with the construction of the dataset.Three anonymous referees provided helpful suggestions. 283

283 The Empire Effect: The Determinants of Country Risk in the First Age of Globalization, 1880–1913 NIALL FERGUSON AND MORITZ SCHULARICK This article reassesses the importance of colonial status to investors before 1914 by means of multivariable regression analysis of the data available to contempo￾raries. We show that British colonies were able to borrow in London at signifi￾cantly lower rates of interest than noncolonies precisely because of their colonial status, which mattered more than either gold standard adherence or the sustain￾ability of fiscal policies. The “empire effect” was, on average, a discount of around 100 basis points, rising to around 175 basis points for the underdevel￾oped African and Asian colonies. Colonial status significantly reduced the de￾fault risk perceived by investors. t was obvious to contemporaries—among them John Maynard Keynes—that membership in the British Empire gave poor countries access to the British capital market at lower interest rates than would have been required had they been politically independent. For liberal critics of the empire, this “empire effect” seemed detrimental to the economic health of the British Isles, which might otherwise have at￾tracted a higher proportion of aggregate investment. Later historians agreed that this was one of the ways in which, by the later nineteenth century, the empire had become a drain on British resources. From the point of the view of the colonies, on the other hand, the ability to raise funds in London at relatively low interest rates must surely have been a benefit—a point seldom acknowledged by critics of imperialism. But did the empire effect actually exist other than in contemporary imaginations? Recent econometric studies of financial markets before the First World War have pointed instead to the gold standard as confer￾ring a “good housekeeping seal of approval,” which lowered the bor￾The Journal of Economic History, Vol. 66, No. 2 (June 2006). © The Economic History Association. All rights reserved. ISSN 0022-0507. Niall Ferguson is Laurence A. Tisch Professor of History, Harvard University, Minda de Gunzburg Center for European Studies, 27 Kirkland St., Cambridge MA 02138. E-mail: nfergus@fas.harvard.edu. Moritz Schularick is Senior Economist at Amiya Capital, London; and Visiting Lecturer, Free University Berlin; John-F.-Kennedy-Institute, Lansstr.7, 14195 Berlin, Germany. E-mail: mschularick@yahoo.de. We are grateful to Nitin Malla for research assistance. We would also like to thank Michael Bordo, Michael Clemens, Warren Coats, Marc Flandreau, Carl-Ludwig Holtfrerich, Trish Kelly, Chris Meissner, Ronald Oaxaca, Thomas Pluemper, Hugh Rockoff, Martin Schueler, Irving Stone, Nathan Sussman, Alan Taylor, Adrian Tschoegl, Marc Weidenmier, and Jeffrey Williamson for comments or assistance with the construction of the dataset. Three anonymous referees provided helpful suggestions. I

284 Ferguson and Schularick rowing costs of the governments of poorer countries regardless of whether they were colonies or not.An alternative hypothesis that has been advanced is that the sustainability of a country's fiscal policy was the prime determinant of market assessments of creditworthiness.Were institutions and investors in the City of London primarily interested in a country's monetary and fiscal policy,regardless of its degree of politi- cal dependence?Or did colonial status have an additional effect on market confidence? It will be seen at once that these things are not easily disentangled because British rule generally implied both currency stability and bal- anced budgets,among other things.This article therefore seeks to reas- sess the importance of colonial status in the eyes of investors before the First World War by means of multivariable regression analysis.We use a new and substantially larger sample of data than previous scholars have used.At the same time,we give priority to variables that we know were available to and heeded by contemporary investors.We show that even when monetary,fiscal,and trade policies are controlled for,there was still a marked difference between the spreads on colonial bonds and those on the bonds issued by independent countries.The main inference we draw is that the empire effect reflected the confidence of investors that British-governed countries would maintain sound fiscal,monetary, and trade policies.We also suggest that British rule may have reduced the endemic contract enforcement problems associated with cross- border lending.Investing in Calcutta was not so different from investing in Liverpool,because both transactions took place within a common le- gal and political framework that served to protect investors'rights.Sov- ereign states,by contrast(and indeed by definition),could not be held to account under English law.This has important implications in the con- text of the emerging consensus among economists that defective politi- cal and legal institutions are one of the major barriers to large,sus- tained,and productive capital flows from rich to poor countries. BRITISH IMPERIALISM AND FINANCIAL GLOBALIZATION BEFORE 1914 Between 1865 and 1914 more than f4 billion flowed from Britain to the rest of the world,giving the country a historically unprecedented and since unequalled position as a global net creditor-"the world's banker"indeed;or,to be exact,the world's bond market.By 1914 total British assets overseas amounted to somewhere between f3.1 and f4.5 See,for example,World Bank,World Development Report 2005

284 Ferguson and Schularick rowing costs of the governments of poorer countries regardless of whether they were colonies or not. An alternative hypothesis that has been advanced is that the sustainability of a country’s fiscal policy was the prime determinant of market assessments of creditworthiness. Were institutions and investors in the City of London primarily interested in a country’s monetary and fiscal policy, regardless of its degree of politi￾cal dependence? Or did colonial status have an additional effect on market confidence? It will be seen at once that these things are not easily disentangled because British rule generally implied both currency stability and bal￾anced budgets, among other things. This article therefore seeks to reas￾sess the importance of colonial status in the eyes of investors before the First World War by means of multivariable regression analysis. We use a new and substantially larger sample of data than previous scholars have used. At the same time, we give priority to variables that we know were available to and heeded by contemporary investors. We show that even when monetary, fiscal, and trade policies are controlled for, there was still a marked difference between the spreads on colonial bonds and those on the bonds issued by independent countries. The main inference we draw is that the empire effect reflected the confidence of investors that British-governed countries would maintain sound fiscal, monetary, and trade policies. We also suggest that British rule may have reduced the endemic contract enforcement problems associated with cross￾border lending. Investing in Calcutta was not so different from investing in Liverpool, because both transactions took place within a common le￾gal and political framework that served to protect investors’ rights. Sov￾ereign states, by contrast (and indeed by definition), could not be held to account under English law. This has important implications in the con￾text of the emerging consensus among economists that defective politi￾cal and legal institutions are one of the major barriers to large, sus￾tained, and productive capital flows from rich to poor countries.1 BRITISH IMPERIALISM AND FINANCIAL GLOBALIZATION BEFORE 1914 Between 1865 and 1914 more than £4 billion flowed from Britain to the rest of the world, giving the country a historically unprecedented and since unequalled position as a global net creditor—“the world’s banker” indeed; or, to be exact, the world’s bond market. By 1914 total British assets overseas amounted to somewhere between £3.1 and £4.5 1 See, for example, World Bank, World Development Report 2005

Empire Effect 285 billion,as against British GDP of f2.5 billion.This portfolio was authen- tically global:around 45 percent of British investment went to the United States and the colonies of white settlement,20 percent to Latin America, 16 percent to Asia and 13 percent to Africa,compared with just 6 percent to the rest of Europe.'Adding together all British capital raised through public issues of securities,as much went to Africa,Asia,and Latin Amer- ica between 1865 and 1914 as to the United Kingdom itself.+ It has been claimed by Michael Clemens and Jeffrey Williamson that there was something of a"Lucas effect"in the period between 1880 and 1914,in other words that British capital tended to gravitate towards wealthy countries rather than relatively poor countries.Yet the bias in favor of rich countries was much less pronounced than it has been in more recent times.In 1997 only around 5 percent of the world's stock of international capital was invested in countries with per capita in- comes of a fifth or less of U.S.per capita GDP.In 1913,according to Maurice Obstfeld and Alan Taylor,the proportion was 25 percent. Very nearly half of all international capital stocks in 1914 were invested in countries with per capita incomes a third or less of Britain's,and Britain accounted for nearly two-fifths of the total sum invested in these poor economies.The contrast between the past and the present is strik- ing.Whereas today's rich economies prefer to"swap"capital with one another,largely bypassing poor countries,a century ago the rich economies had very large,positive net balances with the less well-off countries of the world.8 How important was the empire as a destination for British capital? According to the best available estimates,more than two-fifths(42 per- cent)of the cumulative flows of portfolio investment from Britain to the rest of the world went to British possessions.An alternative measure- the imperial proportion of stocks of overseas investment on the eve of the First World War-was even higher:46 percent.And about half of this amount went to relatively poor British colonies,not to the much 2Cain and Hopkins,British Imperialism,pp.161-63. 3 Maddison,World Economy,table 2-26a. 4 Davis and Huttenback,Mammon,p.46. s According to Clemens and Williamson,"about two-thirds of British foreign investment went to the labor-scarce New World where only a tenth of the world's population lived,and only about a quarter of it went to labor-abundant Asia and Africa where almost two-thirds of the world's population lived":Clemens and Williamson,"Wealth Bias,"p.305.However,see also the different findings in Schularick,"Two Globalizations." Obstfeld and Taylor,"Globalization and Capital Markets,"p.60,figure 10. 7 Schularick,"Two Globalizations,"table 3. 8 Similarly,Schularick and Steger,"Does Financial Integration,"find that financial integration had a positive impact on growth in developing countries before World War I,but not after 1990. The authoritative source for the distribution of British capital exports is Stone,Global Ex- port.See also Schularick,"Two Globalizations,"table 3

Empire Effect 285 billion, as against British GDP of £2.5 billion.2 This portfolio was authen￾tically global: around 45 percent of British investment went to the United States and the colonies of white settlement, 20 percent to Latin America, 16 percent to Asia and 13 percent to Africa, compared with just 6 percent to the rest of Europe.3 Adding together all British capital raised through public issues of securities, as much went to Africa, Asia, and Latin Amer￾ica between 1865 and 1914 as to the United Kingdom itself.4 It has been claimed by Michael Clemens and Jeffrey Williamson that there was something of a “Lucas effect” in the period between 1880 and 1914, in other words that British capital tended to gravitate towards wealthy countries rather than relatively poor countries.5 Yet the bias in favor of rich countries was much less pronounced than it has been in more recent times. In 1997 only around 5 percent of the world’s stock of international capital was invested in countries with per capita in￾comes of a fifth or less of U.S. per capita GDP. In 1913, according to Maurice Obstfeld and Alan Taylor, the proportion was 25 percent.6 Very nearly half of all international capital stocks in 1914 were invested in countries with per capita incomes a third or less of Britain’s, and Britain accounted for nearly two-fifths of the total sum invested in these poor economies.7 The contrast between the past and the present is strik￾ing. Whereas today’s rich economies prefer to “swap” capital with one another, largely bypassing poor countries, a century ago the rich economies had very large, positive net balances with the less well-off countries of the world.8 How important was the empire as a destination for British capital? According to the best available estimates, more than two-fifths (42 per￾cent) of the cumulative flows of portfolio investment from Britain to the rest of the world went to British possessions.9 An alternative measure— the imperial proportion of stocks of overseas investment on the eve of the First World War—was even higher: 46 percent. And about half of this amount went to relatively poor British colonies, not to the much 2 Cain and Hopkins, British Imperialism, pp. 161–63. 3 Maddison, World Economy, table 2–26a. 4 Davis and Huttenback, Mammon, p. 46. 5 According to Clemens and Williamson, “about two-thirds of British foreign investment went to the labor-scarce New World where only a tenth of the world’s population lived, and only about a quarter of it went to labor-abundant Asia and Africa where almost two-thirds of the world’s population lived”: Clemens and Williamson, “Wealth Bias,” p. 305. However, see also the different findings in Schularick, “Two Globalizations.” 6 Obstfeld and Taylor, “Globalization and Capital Markets,” p. 60, figure 10. 7 Schularick, “Two Globalizations,” table 3. 8 Similarly, Schularick and Steger, “Does Financial Integration,” find that financial integration had a positive impact on growth in developing countries before World War I, but not after 1990. 9 The authoritative source for the distribution of British capital exports is Stone, Global Ex￾port. See also Schularick, “Two Globalizations,” table 3

286 Ferguson and Schularick more prosperous areas of white settlement.An obvious hypothesis might therefore be that investors a century ago were more willing to in- vest money in relatively poor countries because a high proportion of these countries were not sovereign states but were under the political control of the investors'own country. Did membership of the British Empire give countries access to the British capital market at lower interest rates than they would have paid as independent states?Contemporaries and an older historical literature had little doubt that it did.Writing in 1924,Keynes noted that "South- ern Rhodesia-a place in the middle of Africa with a few thousand white inhabitants and less than a million black ones-can place an un- guaranteed loan on terms not very different from our own [British]War Loan.”It seemed equally“strange”to him that“there should be inves-. tors who prefer[ed]...Nigeria stock(which has no British Government guarantee)[to]...London and North-Eastern Railway debentures. More recently,Michael Edelstein has argued "that the British capital market treated empire borrowers differently from foreign borrowers." An obvious explanation for an"imperial discount"on bonds issued by British colonies is that they were in some way guaranteed by the British government and therefore in a legal sense indistinguishable from British bonds in terms of default risk.However,Edelstein rejects this expla- nation: Even when London backing and oversight were absent from colonial govern- ment issues...the British capital market charged lower interest rates than com- parable securities from independent nations at similar levels of economic devel- opment....The strong inference is that colonial status,apart from the direct guarantees,lowered whatever risk there was in an overseas investment and that investors were therefore willing to accept a lower retum. Another explanation may lie in the effect of legislation specifically calculated to encourage investors to buy colonial bonds.At the turn of the century,two laws were passed,the Colonial Loans Act (1899)and the Colonial Stock Act (1900),which gave colonial bonds the same "trustee status"as the benchmark British government perpetual bond, the"consol."4 At a time when a rising proportion of the national debt was being held by Trustee Savings Banks,this was an important stimu- lus to the market for colonial securities.5 However,the importance of 10Keynes,“Advice,”pp.204f. 11Edelstein,"Imperialism,"p.205. 2bid,p.206. 13Ibid,Pp.206-07. 14Cain and Hopkins,British Imperialism,pp.439,570.See for a detailed discussion,Keynes. "Foreign Investment,"pp.275-84. is MacDonald,Free Nation,p.380

286 Ferguson and Schularick more prosperous areas of white settlement. An obvious hypothesis might therefore be that investors a century ago were more willing to in￾vest money in relatively poor countries because a high proportion of these countries were not sovereign states but were under the political control of the investors’ own country. Did membership of the British Empire give countries access to the British capital market at lower interest rates than they would have paid as independent states? Contemporaries and an older historical literature had little doubt that it did. Writing in 1924, Keynes noted that “South￾ern Rhodesia—a place in the middle of Africa with a few thousand white inhabitants and less than a million black ones—can place an un￾guaranteed loan on terms not very different from our own [British] War Loan.” It seemed equally “strange” to him that “there should be inves￾tors who prefer[ed] . . . Nigeria stock (which has no British Government guarantee) [to] . . . London and North-Eastern Railway debentures.”10 More recently, Michael Edelstein has argued “that the British capital market treated empire borrowers differently from foreign borrowers.”11 An obvious explanation for an “imperial discount” on bonds issued by British colonies is that they were in some way guaranteed by the British government and therefore in a legal sense indistinguishable from British bonds in terms of default risk.12 However, Edelstein rejects this expla￾nation: Even when London backing and oversight were absent from colonial govern￾ment issues . . . the British capital market charged lower interest rates than com￾parable securities from independent nations at similar levels of economic devel￾opment. . . . The strong inference is that colonial status, apart from the direct guarantees, lowered whatever risk there was in an overseas investment and that investors were therefore willing to accept a lower return.13 Another explanation may lie in the effect of legislation specifically calculated to encourage investors to buy colonial bonds. At the turn of the century, two laws were passed, the Colonial Loans Act (1899) and the Colonial Stock Act (1900), which gave colonial bonds the same “trustee status” as the benchmark British government perpetual bond, the “consol.”14 At a time when a rising proportion of the national debt was being held by Trustee Savings Banks, this was an important stimu￾lus to the market for colonial securities.15 However, the importance of 10 Keynes, “Advice,” pp. 204f. 11 Edelstein, “Imperialism,” p. 205. 12 Ibid., p. 206. 13 Ibid., pp. 206–07. 14 Cain and Hopkins, British Imperialism, pp. 439, 570. See for a detailed discussion, Keynes, “Foreign Investment,” pp. 275–84. 15 MacDonald, Free Nation, p. 380

Empire Effect 287 this legislation should not be exaggerated.The average difference be- tween noncolonial and colonial yields was above 250 basis points be- tween 1880 and 1898 and about 180 basis points between 1899 and 1913-in other words the premium on noncolonial bonds was actually higher before the Colonial Loans Act and Colonial Stock Act came into force.Prior to the First World War,these acts were the only formal en- couragements to investors to favor colonial bonds.16 There are,however,other,less formal reasons why prewar investors may have incorporated an imperial discount when pricing bonds.The Victorians imposed a distinctive set of institutions on their colonies that very likely enhanced their appeal to investors.These extended beyond the Gladstonian trinity of sound money,balanced budgets,and free trade to include the rule of law (specifically,British style property rights)and relatively noncorrupt administration-among the most im- 17 portant "public goods"of late-nineteenth-century liberal imperialism.' Debt contracts with colonial borrowers were more likely to be enforce- able than those with independent states.It would be rather puzzling if investors had regarded Australia as no more creditworthy than Argen- tina,or Canada as no more creditworthy than Chile. For a number of reasons,then,it is possible that the imposition of British rule practically amounted to a"no default"guarantee;the only uncertainty investors had to face concerned the expected duration of British rule.Before 1914,despite the growth of nationalist movements in possessions as different as Ireland and India,political independence still seemed a fairly remote prospect for most subject peoples.At this point even the major colonies of white settlement had been granted only a limited political autonomy.Thus,in the words of P.J.Cain and A.G. Hopkins:"One of the key reasons why the colonies could borrow cheaply [was that]they offered almost complete safety. DETERMINANTS OF BOND SPREADS The possibility exists,nevertheless,that other considerations mat- tered more to investors than the extent to which a country's sovereignty 16It was only after the war that the Treasury and the Bank of England began systematically to give preference to new bond issues by British possessions over new issues by independent for- eign states:see Atkin,"Official Regulation,"pp.324-35. 7Ferguson,Empire,especially chapter 4.A modern survey of 49 countries concluded that common-law countries offered"the strongest legal protections of investors."The fact that 18 of the countries in the sample have the common law system is,of course,almost entirely due to their having been at one time or another under British rule:La Porta et al.,"Law and Finance." See Rostowski and Stacescu,"Wig." 18 Cain and Hopkins,British Imperialism,p.240

Empire Effect 287 this legislation should not be exaggerated. The average difference be￾tween noncolonial and colonial yields was above 250 basis points be￾tween 1880 and 1898 and about 180 basis points between 1899 and 1913—in other words the premium on noncolonial bonds was actually higher before the Colonial Loans Act and Colonial Stock Act came into force. Prior to the First World War, these acts were the only formal en￾couragements to investors to favor colonial bonds.16 There are, however, other, less formal reasons why prewar investors may have incorporated an imperial discount when pricing bonds. The Victorians imposed a distinctive set of institutions on their colonies that very likely enhanced their appeal to investors. These extended beyond the Gladstonian trinity of sound money, balanced budgets, and free trade to include the rule of law (specifically, British style property rights) and relatively noncorrupt administration—among the most im￾portant “public goods” of late-nineteenth-century liberal imperialism.17 Debt contracts with colonial borrowers were more likely to be enforce￾able than those with independent states. It would be rather puzzling if investors had regarded Australia as no more creditworthy than Argen￾tina, or Canada as no more creditworthy than Chile. For a number of reasons, then, it is possible that the imposition of British rule practically amounted to a “no default” guarantee; the only uncertainty investors had to face concerned the expected duration of British rule. Before 1914, despite the growth of nationalist movements in possessions as different as Ireland and India, political independence still seemed a fairly remote prospect for most subject peoples. At this point even the major colonies of white settlement had been granted only a limited political autonomy. Thus, in the words of P. J. Cain and A. G. Hopkins: “One of the key reasons why the colonies could borrow cheaply [was that] they offered almost complete safety.”18 DETERMINANTS OF BOND SPREADS The possibility exists, nevertheless, that other considerations mat￾tered more to investors than the extent to which a country’s sovereignty 16 It was only after the war that the Treasury and the Bank of England began systematically to give preference to new bond issues by British possessions over new issues by independent for￾eign states: see Atkin, “Official Regulation,” pp. 324–35. 17 Ferguson, Empire, especially chapter 4. A modern survey of 49 countries concluded that common-law countries offered “the strongest legal protections of investors.” The fact that 18 of the countries in the sample have the common law system is, of course, almost entirely due to their having been at one time or another under British rule: La Porta et al., “Law and Finance.” See Rostowski and Stacescu, “Wig.” 18 Cain and Hopkins, British Imperialism, p. 240