How the East Was Lost: Institutions, Persistence and Reversal of Fortune in 16th Century Portuguese Empire in Asia

Abstract: After the Portuguese first transposed the sea route to Asia in 1498 no other country managed to do the same for nearly 100 years, allowing the Portuguese to dominate much of the trade between Europe and Asia. When the Dutch and English companies finally managed to muster the technology to sail that route near the turn to the 17th century, they almost instantly displaced the Portuguese and took over that trade. This paper confronts the history of the rise and demise of the Portuguese enterprise in Asia with the recent literature on colonial origins of economic development. The paper analyzes whether the choice by the Portuguese to explore their naval superiority through violence and redistribution rather than through commerce was determined by culture and colonial origin (Steensgaard, 1974; Landes 1998) or by the initial factor endowments encountered in local Asian trade (Engerman and Sokoloff, 2002, 2005; Acemolgu, Johnson and Robinson, 2001, 2002). This choice determined the extractive nature of the institutions that emerged and evolved in the Portuguese enterprise. One of the consequences of this was a pronounced principal-agent problem between the Portuguese Crown and its agents in Asia, who increasing pursued their own interests in detriment to those of the Crown. We show how the Crown’s many attempts to mitigate these losses by changing the organization of its Asian enterprise were systematically undermined by those agents leading to a persistence of the underlying institutions despite the obvious inefficiencies they engendered. The reversal of fortune was completed when the Dutch and English companies arrived and took over most of the Asian trade with Europe.