Bounded leviathan: Fiscal constraints and financial development in the Early Modern Hispanic world

Abstract

Abstract:North's and Weingast's focus on the importance of a ruler's credible commitment to protecting property rights has become the standard approach to states' role in economic growth and been supported e.g. by the "legal origins" literature (LaPorta et al., 1998(LaPorta et al., , 2008 which argued that post-Glorious Revolution English institutions were particularly conducive to economic growth. But growth depends not only investor protection (legal capacity) but also the ability of the state to finance itself, "fiscal capacity". Persson, 2009, 2010) show that the protection of private property rights and that of public property rights to taxation are linked and likely co-evolutionary. However, the precise relation between the two is anything but clear. This paper argues that North and Weingast's model's one-sided focus on state coercion threatening private property rights has obscured the relation between coercion used in revenue collection and the role of fiscal capacity. Our very simple model shows that the relationship between fiscal capacity and legal capacity is not linear, especially in the phase of nation state building. Before 1800 states faced one of two very different central challenges. 1) States that already exhibited high levels of coercion had to try to keep in check the ruler's potential for predation as North and Weingast argued. 2) States that used very low levels of coercion faced a coordination problem instead of a predation issue. The case of Spain provides empirical evidence for the existence of states were an increase in coercion would have improved fiscal capacity, but high levels of legal capacity paradoxically prevented the ruler from adopting this path. Finally, we use financial market developments to show the serious welfare implications that resulted from such a lack of coordination and integration.

The Paradox of Power: Understanding Fiscal Capacity in Imperial China and Absolutist Regimes

“…Besley and Persson (2014) give a host of reasons why this is the case: the presence of a large informal economy, foreign aid, resource dependence, a non-compliance culture, and weak state capacity. Historically, many states, especially autocratic ones such as early modern Spain and the Ottoman Empire, had difficulty collecting taxes in spite of their rulers ostensibly having absolute power (Tilly 1990;Dincecco 2009Dincecco , 2014Karaman and Pamuk 2013;Irigoin and Grafe 2013).…”

“…For the case of Spain, seeIrigoin and Grafe (2013). Like the Qing, the early modern Spanish Empire had little administrative capacity.…”

Salt of the Empire: the making of an Ottoman monopoly, 1838–1881

“…In the second approach, increased coercive effort, i.e. more tax collectors and a more complex administration, raises the opportunity cost of tax evasion only to a certain extent after which further increases would run into decreasing net revenues as a rightward move on an inverted U (Irigoin and Grafe 2013, 201).…”

Fiscal Transfers between Buenos Aires and the Viceregal Interior at the End of the Colonial Period: Fall of the Situado and the Relation with the Regional Royal Treasuries (1800–1810)

“…Before sending remittances to Spain, it was more important that the Crown reallocate resources between different regions in Latin American colonies (and the Philippines) to secure imperial borders and maintain social order 4 . This perspective emphasizes the necessary participation and benefit of Latin American elites in the management and distribution of fiscal resources (in the management of the so-called colonial situado , a transfer of fiscal resources from surplus treasuries to other royal treasuries), thus demonstrating the wide margins of action with which American oligarchies participated in the imperial treasury (Irigoin and Grafe 2006, 2013).…”