What explains variations in state capacity?

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Variations in state capacity can be explained by the presence and absence of institutions, the differences in which can in turn be ascribed to a combination of historical and social factors – notably developments in war-making technologies, colonial status, and ethnic polarisation. There are sound theoretic reasons to think that these components determine state capacity, and robust empirical evidence showing associations between them. Regime type and economic growth are not direct determinants of state capacity, and in the case of economic performance, may be more influenced by state capacity than the other way round. In this essay, I first clarify which characteristics I am referring to by “state capacity”, as well as in what ways those features diverge between states. I then outline and evaluate proposed explanatory variables for variations in state capacity, before concluding that military history, colonisation, and ethnic composition are best able to explain the differences observed, through their effect on the formation of strong or weak institutions.

Although there is substantial disagreement within the literature around what precisely constitutes state capacity, most approaches agree that state capacity is linked to the extent to which government can extract taxes and monopolise violence throughout its territory (Hanson & Sigman, 2021). In line with Lindvall and Teorell (2016), I conceptualise state capacity as the ability of the state to successfully implement its desired policies. This approach has the advantage of avoiding introducing normative judgements around quality of policy or regime type, and acknowledges that it is theoretically possible for an autocratic state to have high capacity whilst providing far below the optimal level of public goods (Fisunoğlu et al. 2022). In addition, implementation of policy encompasses many other components of state capacity. In order for a government’s will to have effect, it must have a sufficiently strong monopoly on violence across the territory and enough extractive capacity in order to fund those policies it wishes. It is also very likely that states with high capacity will successfully enforce contracts and property rights, since a collapse in public order would prevent the government from implementing its desired policy. Taken together, these form the dimensions of coercive, financial, and judicial capacity respectively (Spruyt 2009). The data confirm that these different measures of capacity are strongly correlated with each other, with the highest levels in Western Europe and North America, and the lowest in sub-Saharan Africa (Hanson & Sigman, 2021). Therefore, these operationalisations separately and jointly provide a suitable proxy for the abstract concept of state capacity.

No matter how it is measured, the presence or absence of institutions in a state, as well as the nature of past institutions and those in neighbouring regions, has a large effect on state capacity. As Acemoğlu et al. (2001) demonstrate in their analysis of the performance of former European colonies, there are strong correlations between the presence of early institutions and those today, and between those today and proxies of state financial and legal capacity. Indeed, they find that once these institutional differences are accounted for, there is no residual variation in outcomes which can be explained by other factors like climate, natural resources, or racial composition. Analysis of Asian states including India and Vietnam at a sub-national level confirms this finding that past institutions have a persistent effect on increasing state capacity, even after those institutions are no longer present (Khemani 2019). The presence of institutions in adjacent geographic areas matters as well as their presence in previous time periods: municipality-level variation in Columbia shows large positive externalities from one municipality’s institutions on its neighbours (Acemoğlu et al. 2015). This provides an additional, indirect mechanism by which institutions contribute to state capacity.

A natural next question would be to ask what explains these variations in institutions. There are three main candidates: historical military developments, the growth of capitalist democracy, and ethno-cultural factors. Of these, the first and third factors best explain the differences in institutions we observe.

Developments in war-making in early modern Europe led to increasing returns to scale in violence and created the incentives for state-level institutions to form. New military technologies such as gunpowder and fortifications raised the fixed costs associated with maintaining a capacity for coercion, causing national leaders to gain a competitive advantage over regional ones (Spruyt 2009). The subsequent formation of nationwide armies resulted in a consolidation of kings’ power, bolstering state capacity by increasing the government’s monopoly over violence as the relative strength of local warlords decreased. The historical perspective is supported by broader empirical data showing a strong positive correlation between financial capacity and length of time a state spent at war over its history (Belsey & Persson 2009). This, too, can be explained in terms of the incentives that economies of scale have for the formation of institutions: since military power was supplied most efficiently at the state level, being at war provided an impetus for the development of state capacity. It is therefore clear that developments in military technology, and external conflict played a substantial role in initial emergence of state-level institutions, which we have already shown are the main determinants of present institutions and capacity.

The observed association in Europe between political and economic transformation – such as democratisation and the adoption of a capitalist market economy – and concurrent increases in state capacity might lead one to infer that such political and economic factors can explain present-day variations in the latter. However, this is not borne out by the data. There is no relationship between per-capita income and outbreak of civil war (an indicator of low state capacity) once a time-invariant term for each country is accounted for (Bates 2008), highlighting instead the importance of institutional differences. Moreover, there are numerous undemocratic yet but high-capacity states which are able to effectively implement their desired policies – for instance, East Asian autocracies like China (Khemani 2019). The U-shaped relationship between level of democracy and state capacity (Bates 2008) is a further indication that the former is not necessary for the latter. This pattern can be explained simply by applying a rational-agent model to state leaders and their institutions, though: the longevity of dynastic autocracies creates an incentive for rulers to develop lasting institutions for state capacity, something which is absent in young and unstable democracies (Olson 1993). Taken together, these arguments are a substantial challenge the notion that democratisation determines increases in state capacity, as opposed to incidentally accompanied it in early modern Europe. Therefore, it would be wrong to conclude that political and economic changes can explain the variation in state capacity which we observe today.

One internal factor which does contribute to variation in capacity through its effect on formation of institutions, though, is a state’s ethnic composition. Comparative analysis of European developments in state capacity points to the relative homogeneity of Britain as compared to France, Spain and Poland as a key factor in its ability to build financial capacity faster than rival kingdoms (Johnson & Koyama 2017). When a territory is made up of many geographically discrete ethnic groups, competitive advantage in coercion shifts away from kings towards local warlords, as small-scale autocracy is more feasible to maintain in spite of the greater cost-effectiveness of operating at a larger scale (Olson 1993). As a result, state-wide institutions are less likely to form, and long-term state capacity is thus reduced. Walter and Emmenegger (2022)’s finding that large ethnic divisions in a country can nullify the effect that war-making has on increasing state capacity corroborates this account, demonstrating that economies of scale in violence translate into state-wide institutions only if the territory’s ethnic composition is amenable to centralised government. Therefore, it can be seen that demographics explains some variation in state capacity.

So, to conclude, observed variations in state capacity are best described empirically by the historic presence and absence of institutions within states. This remains true even if the conception of state capacity I favour – the ability of a state to successfully implement its desired policies – is replaced with other definitions focussed specifically on, for instance, financial extractive capacity or the degree of state monopoly over coercion, because of the very strong complementarity between these features of states. As I have shown, historical factors, and particularly developments in war-making, explain the divergence between states in how institutions formed. Ethnic homogeneity is empirically correlated with greater current state capacity, and there are game-theoretic reasons to think that different demographic qualities would lead to variation in institution formation. The fact that these institutions need not be democratic for a state to have high capacity (nor is democracy a sufficient condition) means that regime type cannot be used to explain variations in state capacity, whilst the two-way causality between state capacity and economic outcomes means we cannot say that differences in capacity are explained by economic factors.

Bibliography

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