determinants of fiscal capacity: history, geography or politics? antonio savoia, with r. ricciuti...
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Determinants of Fiscal Capacity:history, geography or politics?
Antonio Savoia, with R. Ricciuti and Kunal sen
Effective States and Inclusive Development (ESID) research centre University of Manchester
www.effective-states.org
DSA 2014 Conference, London
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This paper…
• Looks at long-run factors affecting state capacity
• Asking whether historical, geographical or political factors matter
• Using a new database, capturing better the concept of fiscal capacity
• Evidence that the states are more effective at raising revenues when the have stronger systems of checks and balances
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1. Context and motivation
• Governance matters! • State capacity as an ingredient for effective
governance. – Focus on property rights, but recent research
looks at state institutions… • Gap in empirical research on the determinants
of effective states; no systematic analysis See Savoia and Sen 2014 review Journal of Economic Surveys
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What is state capacity?
• Definition: institutional capability of the state to carry out various policies that deliver benefits and services to households and firms (Besley and Persson, 2011, p.2).
• In practice we have a series of capacities, according to the functions states perform (e.g., legal, infrastructural, military)
• However, they tend to move together– Have strong complementarities and common
determinants
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What is fiscal capacity?
• Fiscal capacity: the state’s ability to raise revenues from taxes
• Shown to be key determinant of long-run economic development (see Dincecco and Katz 2014 EJ)
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Which forces shape state capacity?
• Historical– Incidence of external conflict– Length of statehood– Legal origins
• Geographical– Natural resources abundance – Population density
• Political economy– Executive power subject to checks and balance
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2. Fiscal capacity: data
• Exploit a recent database: Public Expenditure and Financial Accountability (PEFA)
• Dependent variables (coded on 0-3 scale): – “Clarity and comprehensiveness of tax liabilities” – “Existence and functioning of a tax appeals
mechanism”– “Effectiveness in collection of tax payments” – “Aggregate revenue out-turn compared to original
approved budget”
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Explanatory variables
• Proportion years in external conflict• Urban population (% of total)• State antiquity index • Constraints on the executive (Polity IV)• Total natural resource rents (% of GDP) • Controls: legal origins, ethnic fractionalisation,
inequality, internal conflict, aid, regional dummies
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3. Methods
• Cross-section regressions• Sample: ranging from 63 to 40 developing
economies• Identification issues: instrumental variables
methods to account the potential endogeneity of political systems
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4. Results and findings
• There is limited evidence in favour of the ‘historical variables’: stronger for length of statehood than incidence of external conflict.
• ‘Geographical variables’ receive inconsistent support.
• The level of constraints on the executive seems to be the most robust predictor of fiscal capacity.
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Implications
• Evidence supporting the importance of political institutions.
• Good news in policy terms?– Yes: unlike history or geography, institutions results from
collective choices – Not quite: institutional reforms are not an easy task (e.g.,
role of elites)
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State capacities
• Bureaucratic and administrative • Legal • Fiscal • Infrastructural • Military
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Besley and Persson on fiscal and legal capacity
• Fiscal and legal capacity as a joint investment problem
• Idea of complementarity• Prediction: fiscal and legal capacities have
common determinants– factors that raise fiscal capacity are expected to
raise also legal capacity and vice versa– Three types states: common-interest states;
redistributive state; weak state
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Theory of fiscal and legal capacity