POLITICAL INSTABILITY AND PUBLIC-PRIVATE PARTNERSHIPS: Lessons from the English East India Company

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Date:
31 Mar 2016

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During the 1700s and 1800s, the English East India Company was one of the most important firms in the world. Its business of conducting trade between England and Asia required large investments in physical capital, such as ships and forts, and an organisational structure that spanned locations more than halfway across the globe.

New research by Dan Bogart, to be presented at the Economic History Society’s 2016 annual conference in Cambridge, shows how political instability in both England and India caused the English East India Company to invest less in shipping capacity, and ultimately hindered its performance. Higher English budget deficits, changes in the English monarchy, Parliamentary elections and changes in Mughal emperors all were negatively associated with investment.

Political instability is one of the major sources of poor governance and slow economic growth. Regime fragility and social unrest are especially problematic for firms that partner with the government. 

Partnerships often involve infrastructure projects with large fixed costs and uncertain future demand. As a result, they usually include government subsidies to compensate firms for making risky investments. Recently, the success of public-private partnerships has been mixed. The returns have disappointed investors and many projects have been over-budget. 

History offers lessons on political instability and public private partnerships. The English East India Company is especially revealing because it was one of the most important firms in the world during the 1700s and 1800s. 

The Company or EIC was engaged in trade between England and Asia. Its business required large investments in physical capital, like ships and forts, and an organisational structure that spanned locations more than halfway across the globe. 

The EIC is also notable because it entered into agreements with governments on different continents. In 1600, the English monarch gave the EIC a trade monopoly. In return, the EIC paid special customs duties and checked the influence of European rivals in Asia. 

The EIC obtained a different charter from the Mughal emperor to trade in India. It also specified customs duties and required EIC employees to refrain from unlawful actions, especially against pilgrims to the Middle East. In return, the Emperor gave the EIC permission to trade and protections against extractions by government officials. 

The performance of the EIC was mixed during its first 150 years. Most notably, it fell behind the Dutch East India Company from the mid-1600s and did not catch up until the mid-1700s. 

Political instability in England is one explanation for the EIC's weaker performance. The turbulent relations between the Monarchy and Parliament, and between Protestants and Catholics in the 1600s and 1700s disrupted the EIC's business in various ways. 

Most prominently, the EIC was forced to lend to monarchs or pay bribes to retain its privileges. The Monarchy and Parliament also violated the monopoly by authorising private traders to enter the EIC's market.  

The EIC was also affected by instability in India. The Mughal Emperor's government was autocratic and highly corrupt, but it was stable up the late 1600s. Afterwards, succession problems, foreign invasions and regional conflicts contributed to the breakup of the Empire. In the process, the EIC's trade with Indian merchants was disrupted. 

Moreover, constraints on local officials weakened, and the EIC suffered greater extraction. By the 1750s, the EIC used its growing naval power to impose its will on Indian rulers and to drive out competing European companies, ultimately paving the way for territorial rule in India. 

This study provides evidence that political instability in England and India caused the EIC to invest less in shipping capacity, and ultimately hindered its performance. The empirical analysis focuses on the Company's shipping capacity over a 100-year period. 

The results show that various measures of instability, like higher English budget deficits, changes in the English monarchy, Parliamentary elections and changes in Mughal emperors were negatively associated with investment. 

A new media-based measure of policy uncertainty in England also shows negative effects. Lastly, wars in India are negatively associated with import revenues from India, which indirectly affected investment. 

Overall, the study gives new evidence on the effects of instability, especially concerning public-private partnerships. It also has implications for the state of institutions in England and India leading up to the Industrial Revolution. 

ENDS 

‘There can be no partnership with the king’: political instability and the English East India Company

Dan Bogart

dbogart@uci.edu

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