State Capacity and Economic Development: A Network Approach

Abstract

We study the direct and spillover effects of local state capacity using the network of Colombian municipalities. We model the determination of local and national state capacity as a network game in which each municipality, anticipating the choices and spillovers created by other municipalities and the decisions of the national government, invests in local state capacity and the national government chooses the presence of the national state across municipalities to maximize its own payoff. We then estimate the parameters of this model using reduced-form instrumental variables techniques and structurally (using GMM, simulated GMM or maximum likelihood). To do so we exploit both the structure of the network of municipalities, which determines which municipalities create spillovers on others, and the historical roots of local state capacity as the source of exogenous variation. These historical instruments are related to the presence of colonial royal roads and local presence of the colonial state in the 18th century, factors which we argue are unrelated to current provision of public goods and prosperity except through their impact on their own and neighbors' local state capacity. Our estimates of the effects of state presence on prosperity are large and also indicate that state capacity decisions are strategic complements across municipalities. As a result, we find that bringing all municipalities below median state capacity to the median, without taking into account equilibrium responses of other municipalities, would increase the median fraction of the population above poverty from 57% to 60%. Approximately 57% of this is due to direct effects and 43% to spillovers. However, if we take the equilibrium response of other municipalities into account, the median would instead increase to 68%, a sizable change driven by equilibrium network effects.JEL Classification: H4, H7, P16.

State history and economic development: evidence from six millennia

“…The ability to levy taxes and to consolidate an administrative infrastructure has recently been shown to produce regional spill-overs to neighbouring areas' economic performance (Acemoglu et al 2015). Such spill-overs might occur more easily, however, among countries sharing similar histories, including depth of experience with centralized authority.…”

Conservation Contracts and Political Regimes

“…1328. The literature on state capacity is often referring to states in East Asia as strong; see the references in Acemoglu et al (2015). 8 See, for optimal land use models: Hartwick et al (2001); income growth and demand for forest all of these factors might be at play in driving deforestation.…”

“…weak states (or districts) is borrowed from the literature on state capacity (Acemoglu, 2005;Besley andPersson, 2009, 2011), which refers to states as weak if they are unable to control the economy, support private markets, or raise revenues. The role of institutions has also been pointed out by the literature on the resource curse, which has found that a larger resource stock is bene…cial for a country with good institutions, but not if the institutions are weak.…”

“…In a recent paper, however, Acemoglu et al (2015) present a model with multiple states to investigate spillovers across jurisdictions and whether state capacity are substitutes or complements when it comes to public good provision. State capacity is exogenously given in our model; instead we emphasize how the capacity determines the sign of the externality from resource extraction.…”

Is Africa Different? Historical Conflict and State Development

“…State capacity matters for economic development (Besley and Persson, 2013, Dincecco and Katz, 2014, Acemoglu et al, 2015. The success of Asian Tiger nations speaks to the economic role that states can play (Wade, 1990, Evans, 1995, Kang, 2002.…”