The long-run influence of institutions governing trade: Evidence from smuggling ports in colonial Mexico

Abstract

We estimate the long-run impact of historical ports using evidence on legal and contraband trading sites in colonial Mexico (16th to late 18th century). We restrict comparisons to neighboring municipalities and use natural harbors as a source of exogenous variation in the possibility for historical trade. Colonial ports (smuggling and legal ones) led to significantly less poverty, more public goods and greater tax collection in the long run, relative to nearby areas without trade. The long-term effect of trade seems larger in legal ports than in smuggling ones, likely due to early state-enabled agglomeration. In smuggling ports, intermediate outcomes suggest that contraband helped coordinate economic activity, settlement choices, and human capital investments with more liberal trade policies in the 19th century. In the Mexican case, the effect of contraband ports offset their lawlessness, accompanying violence and initial absence of state institutions.