How the East was Lost: Coevolution of Institutions and Culture in the 16th Century Portuguese Empire

Abstract

In 1498 Portuguese explorers discovered the sea route to Asia and for nearly 100 years no other nation managed to follow suit. This monopoly allowed Portugal to establish a vast maritime empire that positioned it to dominate the intercontinental trade in spices and other valuable goods between Asia and Europe, until then the domain of caravans through the Levant. But despite their superior navigation technology and military power, the Portuguese failed to exploit their lead. Even before the British and Dutch finally managed to reach Asia by sea, a century later, the Portuguese enterprise in Asia was already in decline. The literature on the remarkable rise and fall of the Portuguese empire is divided between those that ascribe the decline to culture and others that point to institutional causes. The cultural explanations highlight a rigid medieval society in which elites aspire to be warriors and find commerce undignified. Institutional explanations focus on the excessive centralization of power in the absolutist monarch and the problems that result from the principal-agent relation between the monarch and those charged with running the enterprise in Asia. In this paper we argue that it is shortsighted to try to ascribe primacy to only one of these determining factors. Following a recent literature that highlights the inter-relatedness of culture and institutions in development we argue that the failure of the Portuguese enterprise in Asia must be understood in the context of the transition of a medieval society into the modern era, where new opportunities made possible by new technologies and circumstances put a strain on prevailing beliefs and institutions. These new opportunities required changes in culture and institutions in order to be fully taken advantage of, in particular the embrace of commerce as opposed to violence as the key organizing principle. We show how the Portuguese enterprise in Asia made some moves towards those changes, yet the transition was slow, imperfect and incomplete, leading to inefficiencies and the squandering of opportunities to capitalize on their monopoly. In contrast, the British and Dutch reached Asia with a culture that was more suited to commerce and institutions (e.g. joint-stock companies) that allowed them to very quickly usurp Portugal’s hegemony in the region.