Democracy, Decentralization, and the Effect of Inequality on State Power

• In Event: Elites, Social Class, and State Building

Abstract

Canonical studies in state-building and taxation have shown that early investments in state capacity are associated with a range of positive outcomes in the long term, including greater economic development. Yet the historical processes by which territorial variation in state capacity emerged within countries remains poorly understood. While some scholars have shown that higher levels of economic inequality are correlated with lower state strength, others have documented the opposite association in different settings. In this paper, we further investigate the conditional relationship between economic inequality and investments in state capacity. First, we document substantial spatial and temporal variation in the ability of states to collect taxes. In particular, we focus on Chile, Colombia, Argentina and Brazil. These four territorially large and highly unequal countries differed in some theoretically relevant aspects such as their sociodemographic structure and their political institutions. We then propose a new theory to explain this variation. We argue that specific institutional characteristics within each country determined the extent to which economic elites supported increasing taxation and creating greater infrastructural capacity. Specifically, we argue that the greater political control they had over public resources, the less threatened they felt by the prospect of expanding the ability of the state to tax. To test this hypothesis, we rely on episodes of both political decentralization and franchise extension. Exploiting these “exogenous shocks” that influenced the ability of elites to control political and fiscal institutions at the local level, we examine the conditional relationship between local inequality and public finance. Using original archival data of local tax revenues from the nineteenth and the early twentieth centuries, we find that our theoretical argument explains the observed variation in fiscal capacity over time and across countries. In addition to increasing our understanding of how major national-level institutional changes affect the strategies of economic elites vis-à-vis the state, this work has the potential to influence how we understand the historical development of state capacity across Latin America.

Authors

• Giuliana Pardelli, New York University Abu Dhabi

• Federico Tiberti, Princeton University