Mauricio Drelichman

Associate Professor
Director of the Bachelor of International Economics Program

I am an associate professor in the Vancouver School of Economics at the University of British Columbia in Vancouver, Canada, and a fellow in the Institutions, Organizations, and Growth program of The Canadian Institute for Advanced Research.

My main research area is economic history, with particular emphasis on Early Modern Spain. I am originally from Buenos Aires, Argentina, and I obtained my Ph.D. from Northwestern University in Evanston, Illinois, USA.

At UBC I teach graduate and undergraduate courses, and I serve as the Director of the Bachelor of International Economics Program. One of my hobbies is photography; on my personal page you will find my pictures from many parts of the world, including beautiful British Columbia.

Please click on paper titles for abstracts and full text downloads.

BOOK

Why do lenders time and again loan money to sovereign borrowers who promptly go bankrupt? When can this type of lending work? As the United States and many European nations struggle with mountains of debt, historical precedents can offer valuable insights. Lending to the Borrower from Hell looks at one famous case--the debts and defaults of Philip II of Spain. Ruling over one of the largest and most powerful empires in history, King Philip defaulted four times. Yet he never lost access to capital markets and could borrow again within a year or two of each default. Exploring the shrewd reasoning of the lenders who continued to offer money, Mauricio Drelichman and Hans-Joachim Voth analyze the lessons from this important historical example.

Using detailed new evidence collected from sixteenth-century archives, Drelichman and Voth examine the incentives and returns of lenders. They provide powerful evidence that in the right situations, lenders not only survive despite defaults--they thrive. Drelichman and Voth also demonstrate that debt markets cope well, despite massive fluctuations in expenditure and revenue, when lending functions like insurance. The authors unearth unique sixteenth-century loan contracts that offered highly effective risk sharing between the king and his lenders, with payment obligations reduced in bad times.

A fascinating story of finance and empire, Lending to the Borrower from Hell offers an intelligent model for keeping economies safe in times of sovereign debt crises and defaults.

[go to publisher's site]


ARTICLES

Carlos Alvarez-Nogal and Christophe Chamley recently published a paper in the Economic History Review on “Debt policy under constraints: Philip II, the Cortes, and Genoese bankers”. In this note, we show that several claims in their article are very similar to earlier research results, published or circulated long before Alvarez Nogal and Chamley's original submission, by ourselves and other scholars. These results are repeated without attribution or even mention of the earlier work. In addition, we show that what Alvarez Nogal and Chamley present as new quantitative insights are actually replications of earlier results of ours. Finally, Alvarez Nogal and Chamley misrepresent our contributions, as well as those of several other scholars.

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Contingent sovereign debt can create important welfare gains. Nonetheless, there is almost no issuance today. Using hand-collected archival data, we examine the first known case of large-scale use of state-contingent sovereign debt in history. Philip II of Spain entered into hundreds of contracts whose value and due date depended on verifiable, exogenous events such as the arrival of silver fleets. We show that this allowed for effective risk sharing between the king and his bankers. The existence of state-contingent debt also sheds light on the nature of defaults—they were simply contingencies over which Crown and bankers had not contracted previously.

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Data on housing costs and rental markets for the early modern period are notoriously scarce. Using a new database of rent paid on 183 properties belonging to the Cathedral Chapter of Toledo between 1489 and 1650, we reconstruct housing costs for various social groups and trace the effect of exogenous shocks on the rental market using hedonic techniques. We document a well-functioning market that responded swiftly and predictably to exogenous shocks. We then explore the impact of adding rent to early modern price indices and estimates of living standards. Price indices show a moderate effect. The addition of rent reduces the gap between Toledo and two northern European locations by up to 9.5%.

[go to article] [pre-press version] [download data and replication code]

Philip II of Spain accumulated debts equivalent to 60% of GDP. He also failed to honor them four times. We ask what allowed the sovereign to borrow much while defaulting often. Earlier work emphasized either banker irrationality or the importance of sanctions. Using new archival data, we show that neither interpretation is supported by the evidence. What sustained lending was the ability of bankers to cut off Philip II’s access to smoothing services. Making loans in overlapping coalitions, the Genoese acted in unison in times of crisis. Lending moratoria were enforced through a “cheat the cheater” mechanism (Kletzer and Wright, 2000). Thus, market power and reputational concerns were sufficient to sustain lending under conditions of anarchy.

[go to article] [go to pre-press version]

Philip II of Spain accumulated debts equivalent to 60% of GDP. He also defaulted four times on his short-term loans, thus becoming the first serial defaulter in history. Contrary to a common view in the literature, we show that lending to the king was profitable even under worst-case scenario assumptions. Lenders maintained long-term relationships with the crown. Losses sustained during defaults were more than compensated by profits in normal times. Defaults were not catastrophic events. In effect, short-term lending acted as an insurance mechanism, allowing the king to reduce his payments in harsh times in exchange for paying a premium in tranquil periods.

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The defaults of Philip II have attained mythical status as the origin of sovereign debt crises. We reassess the fiscal position of Habsburg Castile, deriving comprehensive estimates of revenue, debt, and expenditure from new archival data. The king’s debts were sustainable. Primary surpluses were large and rising. Debt/revenue ratios were broadly unchanged across Philip’s reign. Castilian finances in the sixteenth century compare favorably with those of other early modern fiscal states at the height of their imperial ambitions, including Britain. The defaults of Philip II therefore reflected short-term liquidity crises, and were not a sign of unsustainable debts.

Note: the published version of this article was abridged for reasons of space. You may download the unabridged version and the full dataset from the links below.

[go to article] [go to unabridged version] [go to dataset]]

The Mesta was the association of the migratory shepherds of Castile, controlling fine wool production between the thirteenth and the nineteenth centuries. Its royally granted privileges have often been blamed for the stagnant Spanish agricultural productivity during the Early Modern period. I argue that the Mesta’s privileges allowed Medieval Castile to develop its comparative advantage in wool, and that the Crown was able to restrict their scope and application when economic conditions favored arable farming interests. I support my argument with extensive archival data, including a new series of wool prices and a detailed analysis of lawsuits involving the Mesta.

[go to article] [go to pre-press version] [go to dataset]

This article examines the debt history of two contenders for European hegemony: 16th-century Spain and 18th-century Britain. We analyze their fiscal behavior using measures of overborrowing and fiscal policy institutions. Our results suggest that stringency was not key for Britain's success in avoiding default. Instead, fiscal repression allowed the United Kingdom to borrow at below-market rates, thereby outspending its continental rivals.

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The widespread ennoblement of the Spanish bourgeoisie in the Early Modern period has been traditionally considered one of the main causes of the Spanish “crisis of the seventeenth century.” I provide the first quantitative assessment of the scale and characteristics of ennoblement through a new time series of nobility cases preserved in the Archive of the Royal Chancery Court of Valladolid. Contrary to established scholarship, I find that the tax exemptions granted to nobles cannot alone explain the flight to privilege, since ennoblement was more costly than the present value of the future tax benefits. My data strongly suggests that the central motivation behind ennoblement was to gain control of local governments and acquire decision-making power over communal resources. Finally, while ennoblement reflected a high level of redistributive activity, there is no evidence in the archival record linking it to economic stagnation in Spain.

[go to article]

The windfall acquisition of precious metals from American mines and the military revolution of the Early Modern age allowed the Spanish monarchs to command large amounts of credit and pursue an expansive imperial policy unlike that of any other Early Modern nation; when the cost of the Empire increased and mineral rents fell, the Crown auctioned off privileges and tax exemptions to fund its military efforts. I document how the silver windfall was linked to the credit expansion and the undertaking of imperial policy. I then develop a model that shows how such a policy led Spain down a rent-seeking spiral, and accounts for the persistence of high rent seeking and slow growth even after the imperial policy was abandoned.

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This study formalizes and empirically tests the conjecture that the discovery of large silver reserves in its American colonies triggered in Spain a phenomenon known as the Dutch disease, diverting factors of production to non-traded goods industries and undermining the Spanish comparative advantages in the Early Modern Age. I develop an open-economy model to mimic the economic conditions in Spain in the wake of the silver discoveries, which predicts an increase in the relative price of non-traded goods following a positive wealth shock. I then construct price indexes for traded and non-traded goods using Earl Hamilton's price series and new consumption baskets. Using a Markov-switching regression model, I identify a strong and persistent increase in the relative price of non-traded goods coinciding with the silver discoveries, lasting for almost three decades and reversing itself only after the 1575 and 1579 crown bankruptcies. These findings largely support the Dutch Disease hypothesis.

[go to article] [go to dataset]


BOOK CHAPTERS

Lending to early modern monarchs could be very profitable, yet highly risky. International financiers unlocked the excess returns in sovereign debt markets by parceling out the risk and transferring it to downstream investors in exchange for financial intermediation fees. We link two sovereign loans to Philip II of Spain to a downstream Genoese partnership. After examining the performance of the loans through the 1596 bankruptcy and its ensuing settlement, we conclude that the risk diversification scheme used by international bankers worked. Shares in sovereign loans were held within highly diversified portfolios, enhancing their returns in normal times and not posing excessive risks when caught in a default.

[go to pre-press version]

In the early modern era, Spain went from being a fractious European backwater to rule over one of the largest empires in history. By 1700, it had once again sunk into relative obscurity. This article surveys the political institutions and the public finance instruments that made such a remarkable historical trajectory possible.

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We examine the stagnation and decline of Castile in the Early Modern period in the light of the recent literature highlighting the interaction between natural resource abundance and institutional quality. Our conclusion is that Castile suffered from becoming too rich too fast. American treasure overwhelmed the country’s institutional setup, resulting in a fully fledged “resource curse” that affected the economy, domestic and foreign policy, and the structure of client networks. We also explore the question of whether the resource windfall further weakened Spanish institutions, thus further hampering economic growth in the long run.

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WORKING PAPERS

Alvarez-Nogal and Chamley (2015) analyze one debt contract signed by lenders to Philip II, previously discussed in Drelichman and Voth (2014). They re-examine cash flows and challenge our interpretation of this particular contract’s profitability. A closer look reveals that the alleged differences between their and our calculations simply reflect the use of conservative assumptions on our part, which systematically biased estimates of profitability downwards – as good scholarship requires if one is to argue that high profits were one of the main reasons why people lent to Philip II. We also question their use and reading of archival documents, as well as their use of basic financial economics. Finally, we document a continuing pattern of academic misconduct, including plagiarism, the misrepresentation of our findings, and the complete fabrication of a quote in order to discredit our work.

[go to manuscript]


OTHER PUBLICATIONS

Click here to view my Google Scholar research profile.

Summer 2016

ECON101 Principles of Microeconomics Sections

Elements of theory and of Canadian policy and institutions concerning the economics of markets and market behaviour, prices and costs, exchange and trade, competition and monopoly, distribution of income.

Summer 2016

ECON531 Economic History of Modern Europe Sections

I am fortunate to live in a wonderful corner of the world, and to travel to many enchanting locations. My online photo galleries contain many images that I shot around Vancouver, across British Columbia, in many Canadian locations, and all over the world. Feel free to stop by for a visit!