Nov 24, 2013

On the Origin of States

Interesting paper by Raul Sanchez de la Sierra. The subtitle is "Stationary Bandits and Taxation in Eastern Congo." The abstract
The state is among the greatest developments in human history and a precursor of economic growth. Why do states arise, and when do they fail to arise? A dominant view across disciplines is that states arise when violent actors impose a "monopoly of violence" in order to extract taxes. One key fact underlies all existing studies: no census exists prior to the state. In this paper, I provide the first econometric evidence on the determinants of state formation. As a foundation for this study, I conducted fieldwork in stateless areas of Eastern Congo, managing a team that collected village-level panel data on current armed groups. I develop a model that introduces optimal taxation theory to the decision of armed groups to form states, and argue that the returns to such decision hinge on their ability to tax the local population. A sharp, exogenous rise in the price of a bulky commodity used in the video-game industry, coltan, leads armed groups to impose a "monopoly of violence" in coltan villages. A later increase in the price of gold, easier to conceal and hence more difficult to tax, does not. Results based on two alternative identification strategies are also consistent with the model. The findings support the hypothesis that the expected revenue from taxation, in particular tax base elasticity, is a determinant of state formation.
From the conclusions
Eastern Congo attracts a large part of the world’s development and humanitarian aid. First, this paper suggests that development aid disbursed in this area provides potentially a source of revenue to armed groups. This paper’s findings demonstrate that armed groups often settle in individual villages, and systematically raise taxes on a large number of economic activities, not only on the mineral trade, contrary to what is commonly believed. Aid that does not take into consideration the revenues it can generate to armed groups may counteract policies aimed at weakening armed groups. Second, the findings of this paper also suggest how to design aid minimizes this risk. Aid that translates into unobservable or intangible assets, may be harder to tax. This is the case of education and health (p. 34).
The “stationary bandits” I am able to observe are a mixed blessing. On the one hand, they weaken the authority of the state and sometimes abuse civilians. On the other hand, they engage in relationships of mutual dependency with civilians, and provide services that the state is unable to provide, in particular, protection (p. 35).

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