textiles and opium in india

967 American Economic Review 2008 , 98:3, 967–989 http://www.aeaweb.org/articles.php?doi 10.1257/aer.98.3.967 Many economists and policymakers hold that export and trade spur economic development. With globalization, there is potential to export goods to far-off markets, and many see trade as a way to raise incomes in t he devel oping world. Y et how is th is export accomplished? How can local production reach the global marketplace? What contractual problems do exporters face? This paper examines these questions. We consider the microeconomics of export procurement. The paper builds a heuristic model of transactions between exporters and local producers. We relate the model to the operations of a large multinational company, the East India Company (EIC), whose records provide a rich source of information on problems of contracting for export. We focus on a venture that is especially well documented: cotton textile procurement in Bengal in the second half of the eigh- teenth century. 1 Textiles, produced at home by weavers dispersed across the countryside, were the Company’s most important export to Europe. 2 The Company primarily procured these textiles using t he “ Agency Sy stem,” where the E IC hired local employ ees—agents—to t ransact with weavers. Typical agreements with weavers speci fied a loan for working capital, the quality and quantity of cloth to be produced, and quality-contingent prices. But the system did not work so well. It was fraught with “corruption” —or oppor tunistic behavior—on the par t of the agents, the weavers, and of ficials of the EIC itself. 1 “Bengal” here refers to the regions that eventually became Bangladesh and three states in independent India: West Bengal, Bihar, and Orissa. Our sources include Narendra K. Sinha (1956), P. J. Marshall (1976), and, especially, Debendra B. Mitra (1978) and Hameeda Hossain (1988). 2 By the 1750s, textiles accounted for more than 80 percent of the value of the EIC’s exports from Bengal. Cotton products constituted more than 88 percent of the value of textile products (Sushil Chaudhury 1995, 182, 192). By R K A V . S* Trade and export, it is argued, spur economic growth. This paper studies the microeconomics of exporting. We build a heuristic model of transactions between exporters and producers and relate it to East India Company (EIC) operations in colonial Bengal. Our model and the historical record stress two dif ficulties: the exporter and its agents might not uphold payment agreements, and producers might not honor sales contracts. The model shows when procurement succeeds or fails, highlighting the tension between these two hold-up problems. We analyze several cases, including the EIC’s cotton textile venture, the famous Opium Monopoly, and present-day contract farming. ( JEL D86, F14, N55, N75) * Kranton: Department of Economics, Duke University, Durham, NC 27705 (e-mail: [email protected]); Swamy: Department of Economics, Williams College, Williamstown, MA 01267 (e-mail: Anand.V.Swamy@williams. edu). We thank an anonymous referee for comments; Joe Altonji, Cheryl Doss, Doug Gollin, and Santhi Hejeebu; and par ticipants at the Yale Development Lunch, ESSET 2006, 75 Y ears of Development Economics Conferenc e at Cornell, Third Mini-conference in Development CIRPÉE/LAVAL, World Bank Microeconomics of Growth conference, and seminars at the University of Arkansas, Columbia University, Drexel University, MIT, and the Institute for Advanced Study for helpful suggestions and discussion. We thank Natalia Perez for her research assistance. Rachel Kranton thanks the Institute for Advanced Study, Princeton’s Research Program in Development Studies, and the National Science Foundation for support.

textiles and opium in india

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