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War and the Fiscal Capacity of the State

Abdur Chowdhury () and Syed Murshed
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Syed Murshed: International Institute of Social Studies, The Hague

No 2013-03, Working Papers and Research from Marquette University, Center for Global and Economic Studies and Department of Economics

Abstract: We examine the role of war in retarding state fiscal capacity in developing countries, measured by tax revenue ratios to GDP. This in contrast to the European experience from the Renaissance to the 20th century, where it is believed that war and state-building were inseparable, enhancing the fiscal capacity of the state; in turn enlarging the scope and magnitude of government expenditure. We build a simple theoretical model of a factionalized state, where patronage substitutes for common interest public goods, along with the possibility of violent contestation over a rent or prize, typically in the form of natural resource revenues. Our dynamic panel empirical analysis on the determinants of fiscal capacity is applied to 79 developing countries, during 1980-2010. Results indicate that war, especially in its current dominant form of civil war, retards fiscal capacity, along with imperfect democracy, political repression, the quality of governance, dependence on oil and macroeconomic mismanagement. High intensity conflict is particularly destructive of state capacity. Countries experiencing low intensity wars, other institutional factors may matter more for fiscal capacity formation compared to war. The diminution of state capacity due to war appears less pronounced after the end of the cold war.

JEL-codes: F51 H2 O11 (search for similar items in EconPapers)
Date: 2013-04
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