State capacity and development

<p><em>Romesh Vaitilingam interviews Tim Besley for Vox</em></p>
<p style="padding: 0px 0px 0.5em; margin: 0px;"><em>June 2011</em></p>
<p style="padding: 0px 0px 0.5em; margin: 0px;"><em>Transcription of a VoxEU audio interview [http://www.voxeu.org/index.php?q=node/6684]</em><b>&nbsp;</b>&nbsp;</p>
<p><b>Romesh Vaitilngam</b>: &nbsp;Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilngam, and today's interview is with Professor Tim Besley from the London School of Economics. In June 2011, Tim spoke at a conference on develop policy making organized by the Center for Competitive Advantage in the Global Economy. His talk was titled &quot;State Capacity and Development.&quot; When we met soon after the conference, I began by asking him to explain the idea of state capacity, which he believes should be at the heart of the development policy debate.</p>
<p><b>Tim Besley</b>: &nbsp;We use the term state capacity as a catch‑all for those things that the state invests in to become an effective organization. We focus, I suppose, more than anything else on two dimensions of that: the effectiveness of the state's ability to raise revenues and the development of tax systems. The other part we talk about is legal capacity, which is the ability of the state to become an enforcer of property rights, a registrar of personal property and land, and an overseer and regulator of financial markets--the whole gamut of things which require a strong set of legal structures to support markets.</p>
<p><b>Romesh</b>: &nbsp;This is really a useful way of understanding an issue that a lot of people in development are concerned about at the moment. These are fragile states, states which are very poor and don't have the institutions that seem to be able to get them out of that state of poverty.</p>
<p><b>Tim</b>: &nbsp;Yeah, and in fact... Funny enough, this was a case where our research, where we began wanting to understand state capacity, led us towards this policy debate that we had initially not been that aware of. But you're absolutely right. I think it now comes together with what has become a real priority in the development policy area, which is to say if you look around the world and say &quot;Where have the really difficult cases of underdevelopment persisted?&quot; And even declining states, they have been in these so-called fragile states.</p>
<p>And therefore, the general view, I think, had increasingly become that's where all the focus of international attention has to be.</p>
<p><b>Romesh</b>: &nbsp;Can we talk a little bit about these two areas? You have fiscal capacity on one hand and legal capacity on the other. If we start off with the tax system, because of course, revenue in order to invest in infrastructure and the education of your population is absolutely essential. How does a country, in a way, start from a position of having low capacity to raise taxes to be able to generate taxes?</p>
<p><b>Tim</b>: &nbsp;The core idea in the way we come about this is to say this is a political economy issue. You have to understand how governments have historically, and in the contemporary world, made these decisions to build tax systems. What we mean by &lsquo;build tax systems&rsquo; rather than &lsquo;raise taxes&rsquo; is that you need to make investments in the kind of infrastructure that you need to support a tax system. You need monitoring and collection. You need to have a whole series of compliance tools to make sure that people actually deliver on their taxes. So if you think of it in that sense, as an investment, then what are the motives that will make such investments worthwhile? Well, you can think there are factors about the economy. Obviously, if you have a more market based economy then it's easier to tax transactions than if you have a large informal economy. But of course over time, you get more formality and therefore tax systems develop as you get more formality.</p>
<p>So there's a set of economic factors. Then there are a set of what we think of as demand-side factors for what the state produces. One of the most interesting hypotheses that we came across when we started this work is in the work of Charles Tilly on the idea that war historically was one of the big demand-side factors. Governments needed revenues to fight wars, and one of the arguments is that what was exceptional about Western Europe was the extent to which warfare became a key focus of what state activity was and became the driving force, therefore, behind fiscal systems. So there's what you might call demand-side factors.</p>
<p>And then there's the ability of the state to respond to those demand-side factors, which is the nature of political institutions. There the core argument is that because if you raise a lot of revenue you want to think about the control that the citizens, the taxpayers if you like, have over the way that revenue is dispersed, you need strong representatives form local institutions. We use the term &lsquo;cohesive institutions&rsquo; to think of the case where there's a fair amount of citizen control over the way those revenues are raised.</p>
<p>Putting those ingredients together--the economics, the demand side, and the political institutions--can give you a conceptual framework for thinking about investing and fiscal capacity.</p>
<p><b>Romesh</b>: &nbsp;You mentioned war, perhaps, as a driver for establishing fiscal institutions. I guess there's a whole issue here around physical violence. In a way, you might use an external war as a way of generating support, a common interest within the country. But there are also problems in many countries of civil war and people contesting the control of the institutions.</p>
<p><b>Tim</b>: &nbsp;Yeah, and that's a key part of the whole research program, is to understand political violence and its role. As you say, external political violence may play a very different role to internal political violence. One of the key functions of the state ‑‑ this is not our idea, this is something that permeates the whole literature on state formation ‑‑ is the need to establish law and order and peace within a jurisdiction. And obviously, one feature of many countries in the world is sadly that they've singularly failed to deliver peace and security for their citizens. And even if they do, there's sort of two ways to do it. One is to do it by having a genuine peace supported by cohesive institutions. The other is to do it by having one force repressing the will of the citizens who are in charge. We don't think that's much of a solution. And so, repressive states we would also think of as being problematic, in the sense of not really having established what you would want to achieve in the form of a stable and peaceful state.</p>
<p><b>Romesh</b>: &nbsp;In your research, you quote Adam Smith calling for peace and taxes and justice as the three elements for a successful economy. You talked a little bit about the war and peace element and the taxes element. Can you unpack a bit the justice element?</p>
<p><b>Tim</b>: &nbsp;Of course we all knew this quote from Adam Smith, but actually quite late in the research project we realized that what we were arguing looked rather similar to the three components. So yeah, on the justice side, that&rsquo;s our map into what we call legal capacity an the fact that an effective, prosperous economy relies on all manner of input from an effective legal system--contract enforcement, property rights, and the rest. And so to the extent that we are talking about justice here, we're not talking about justice writ large, human rights and other things, although those ideas do link to our agenda. We're really talking about justice in a narrow sphere of how people are able to contract freely with one another and to engage in commerce without fear of predation and all the other things that can go wrong.</p>
<p><b>Romesh</b>: &nbsp;In a sense, we've been talking about development in terms of the government and the citizens of a country, but in real terms talking about development is talking about what the advanced countries, the development community worldwide, can do to encourage development in many of these fragile states that don't have the institutions that they need. What kind of messages would you take from your research to give to the development policymaking community?</p>
<p><b>Tim</b>: &nbsp;There's sort of one think I think that worries me at the heart of the development industry. That's that often it appears that it wants to navigate around the problems that we identify that are the core of fragile states. Which in our case, I think, comes down essentially to the problems in noncohesive political institutions and the way that manifests itself either in violence or poor state capacity. If you're trying to navigate around it, it can become worse than just navigation around, it can actually entrench the very problem that you're trying to alleviate. In fact, if you look at the historical critiques, for example, Peter Bower's famous critique of aid. In some respects, you can see that argument through the lens of the approach that we've taken.</p>
<p>So it's not that the international community can't make a big difference, but I think it has to diagnose the problem as fundamentally one of noncohesive political institutions. If you see it that way, then any leverage that the international community has ought to be to fundamentally shift those political constraints.</p>
<p>That raises all manner of issues around what people will often refer to as neocolonialism and trying to change sovereign states and so forth. I understand all that. On the other hand, you wonder how far, when the international community is saying &quot;We're trying to have a helping hand,&rsquo; if they're really entrenching the problem.</p>
<p>That really goes to the heart of the aid pessimists. So you're maybe fueling aid pessimism by not confronting what is the real issue.</p>
<p><b>Romesh</b>: &nbsp;Could we perhaps look at one or two examples? I guess one that's in the news at the moment is the Arab Spring, where we've talked about long standing repressive regimes, which may have contributed to the stability of their societies but they hadn't really contributed much to economic development. Now we're perhaps moving beyond that to these countries becoming fragile states. What do you think your framework, in a way, can bring to thinking about what happens, how the international community can help those countries develop?</p>
<p><b>Tim</b>: &nbsp;There's really an optimistic and a pessimistic case. Being, perhaps, of an optimistic nature let me push the optimistic view, which is that this is a great opportunity to realize the virtues of building cohesive institutions. I would like to think the main role of the international community is to do whatever it can take to shift and to reform the local institutions so that these countries move onto the path of common interests and not onto the path of fragility. I think, obviously, it's a country-by-country judgment, and very specific to the historical circumstances of any case. But as we observe what's going on in these countries, I think ultimately it has to be in the form of trying to build cohesive institutions.</p>
<p>But generating cohesive institutions is a very complicated thing, and something we've got a lot to learn about. As researchers and I'm sure policy makers have got a lot to learn about it.</p>
<p><b>Romesh</b>: &nbsp;Tim Besley, thank you very much.&nbsp;</p>
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