9

State Building Trajectories

Figure 1.3 traced five ideal trajectories of state building, A–E. There I argued that most European countries in early-modern times followed paths A and B, involving domestic resource mobilization in the form of taxes and domestic credit.¹ Most developing nations in the Bond Era, by contrast, followed paths C–E, characterized by substantial external finance. In chapter 5, I focused on the thin line that separates paths C–E, and why developing nations often dropped from C (under which debt is repaid with tax money and state capacity is strengthened) to E (under which debt service is suspended and followed by foreign control).

Opportunities to escape path E may be present, however, when external finance is tight and public funds are in high demand. Under those conditions, rulers’ incentives to mobilize domestic resources in the form of taxation grow stronger.² Those tax efforts, I claim, are likely to persist because tax administrations generate an interest in organizational survival—the bureaucratic mechanism of transmission—and because new taxes can open the door to power-sharing institutions—the political mechanism.³

In this chapter, I expand on the two mechanisms of transmission by examining five historical cases: Japan, Argentina, Siam, Ethiopia, and Chile. In selecting cases, I draw from a group of non-European sovereign nations because that condition is required to study the political mechanism, denied outside white-settler colonies. The discussion is organized in three parts: First, I focus on Meiji Japan (1868–1912), which I briefly compare to Argentina, a shadow case. Japan financed war overseas and built a strong state, challenging the theoretical expectation in chapter 2. I argue that this country was able to escape a debt trap because it had a preexisting domestic credit market—a rarity in the global periphery. Domestic resource mobilization along path C activated the bureaucratic and political mechanisms of transmission. I compare Japan to Argentina, one of the wealthiest economies of the world in the early twentieth century. Argentina could not follow the steps of Japan, I argue, because it lacked domestic financiers, hence safeguards against external dependence. Foreign debt grew onerous and Argentina fell behind. The Japan-Argentina dyad shows the challenges of staying away from path E when domestic credit markets are tight.

The second part of the chapter brings us to Siam (renamed Thailand in 1939). Siamese kings in the nineteenth century renounced external finance because they feared the consequences of default. Relentless fiscal centralization and military modernization initiated in the late nineteenth century gave way to a military-bureaucratic regime. Lacking a mass of domestic merchants that could withdraw tax payments unless fiscal powers were shared, state building in Siam walked path A but did not activate the political mechanism of transmission. There lies, I argue, the limited gains in fiscal and state capacity after 1932, when state bureaucrats assumed political power. The case of Siam is briefly compared to Ethiopia, the only African country that remained independent in the nineteenth century. Like Siamese leaders, the Ethiopian emperor avoided foreign finance because of the strings attached. Ethiopia also was poor and lacked a mass of merchants that could lend the emperor money and discipline him in exchange. Early efforts of state building improved bureaucratic capacity along path A but carried no political concession to taxpayers. Relative to Siam, the resolution to rely on domestic resources to fund government ceased too early. Increased dependence on foreign loans and international aid under Haile Selassie (r. 1916–1974) pushed Ethiopia into path E and the fragile state it is today.

In the third and last part of the chapter, I examine state building in Chile, where war under capital exclusion put the bureaucratic and political mechanisms of state building in motion. When tax capacity increased, unease with strong presidential power grew among local merchants, concentrated in two large cities and well coordinated. After a violent dispute in 1891, constitutional reform strengthened parliamentary oversight of budgeting powers, enabling sustained investment in state capacity over the next decades. This case suggests that incentives to push forward major financial innovation along path A may happen when the treasury runs out of options—and yet may carry lasting positive consequences.

9.1 Japan

If there is one success case of state building and external finance, that is Japan. By 1850, this country had lived in autarky for two and a half centuries. Within a generation, Japan was integrated in the global economy and had become the regional military power. Modern weaponry was imported and financed with European private capital. Japan scrupulously met its foreign obligations, proving that external finance is not incompatible with state building. As it turns out, local conditions were exceptional. No other country outside Western Europe and the United States could count on a strong local capital market. That changed it all.

9.1.1 MILITARY AND ECONOMIC MODERNIZATION

In the Tokugawa era (1603–1867), Japan was organized into a collection of semiautonomous feudal domains, and the central government, or shogunate, had no fiscal powers nor monopoly of coercion. This suddenly changed in 1854 when a military envoy of the United States, Commodore Matthew C. Perry, forced the opening of trade ports and tariff limits on imports. The opening (first to the US, soon after to European powers) caused political turmoil within the Japanese leadership, divided about the appropriate response to the Western threat. In 1868, a coup orchestrated by court nobles and domain officials ended the Tokugawa regime. Political centralization under the figure of the Meiji emperor became the top priority of the new regime—a goal largely met: “[Japan] began the Meiji period as one of the modern world’s most fractured polities, [but] emerged within a generation as one of its most centralized states.”⁴ The new regime was markedly oligarchic,⁵ and the first years were characterized by frequent insurrections, even civil war.⁶ However, and despite the frequent power struggles within the elite, the national government pushed forward an agenda of military and economic modernization.

China, the almighty regional power,⁷ had been humiliated by European powers in the two Opium Wars. The negative consequences of foreign aggression in China resonated in Meiji leaders’ minds,⁸ solidifying support for military modernization. Within decades, Japan put together a powerful military force supported by a system of mass conscription (adopted as early as 1873) and modern armament. Military officials were hired in Europe to teach modern strategy, and state-of-the-art military equipment was imported from England and Germany. Between 1897 and 1902, for instance, all (six) of the battleships of the new Imperial Japanese Navy were built in Britain.⁹ Railroad networks, a second modernization goal, grew in parallel to military investment; however, railroads were disproportionally financed with local capital. By 1902, 73 percent of the rail network was owned by local conglomerates.¹⁰ Partial nationalization took place between 1906 and 1907. Subsequent expansion was evenly divided between public and private initiatives.

To fund military and economic modernization, the government put forward an ambitious plan of monetary and fiscal centralization. The Bank of Japan (inaugurated in 1882) and the new convertible currency (adopted in 1885) allowed for tighter control of capital and commercial flows with the West.¹¹ Fiscal centralization began as early as 1871, when the new imperial government abolished the autonomy of 260 estates and domains, assumed their outstanding debt, and declared political and fiscal sovereignty over all the territory.¹²

Agrarian reform was the first consequence of centralization. Following a nationwide land survey, property rights were granted to small farmers in 1872.¹³ Ownership came with increased taxation, causing mass opposition. The government reduced the rates in response—the start of a gradual decline of land tax in the national budget. Whereas in the early 1870s land tax yields represented over 90 percent of total tax revenue, by 1914 they accounted for less than 20 percent.¹⁴ The Ministry of Finance, “a major bastion of Westernizing officials,”¹⁵ replaced land taxes with modern tax types. Excise taxes on sake became a major source of revenue, particularly after the war with China (at a time new foreign loans were quoted). Initially, the collection of the excise was delegated to local officials, but in 1880 it was assumed by the Ministry of Finance, replicating the successful beer excise administration in Britain.¹⁶ By 1914, the liquor tax represented 28 percent of total tax revenue (up from 10 percent in 1880).¹⁷ The income tax was adopted in 1887. Initially collected by private financial institutions, the National Tax Agency took over in 1896 after inaugurating regional tax offices.¹⁸ Although the early proceeds of the income tax were small, this tax raised more than 11 percent of total revenue by 1914.¹⁹

The central bureaucratic apparatus was also modernized following the example of Western countries. In 1873, the state administration was purged of kuge—old-regime, high-status samurai—and meritocratic criteria for public service were introduced along the lines of the French public service.²⁰ By 1900, access to the administration required specific training and passing a certification exam, and bureaucrats were insulated from the clout of ministerial officers and local notables thanks to a system of tenure promotion and public pensions.²¹ “Within the span of [a] generation an administrative structure [emerged] that has continued to be the basis for civil service up until the present.”²²

Fiscal reform was fruitful. By 1868, the share of taxes as a percentage of GDP was as low as 0.05 percent (not a typo).²³ Taxes represented only 10 percent of total revenue of the central government, the remaining coming from government enterprises, state monopolies, stamps, currency emissions, and borrowing. On the eve of the Great War, the tax ratio had risen to 8.1 percent of GDP, and taxes represented 51.2 percent of all government revenue. From 1886 onward, all budgets were in surplus.

9.1.2 EXTERNAL FINANCE

The spectacular growth in fiscal capacity did not suffice to fund modernization. Economic reform (industry, telecommunications, and railroads) was mainly financed with tax revenue and domestic bonds. Foreign direct investment in those sectors was kept to a minimum (unlike in China or Argentina, discussed below). By contrast, external public finance played a key role in military modernization. Seventy-five percent of total loan issue (net of conversion loans) was used to pay for military outlays.²⁴ In other words, European capital flowed into Japan in the form of sovereign loans, mostly to fund military expenses.

Access to foreign funds came with a risk. Meiji leaders “recognized that defaults led to a loss of fiscal sovereignty to foreign powers,”²⁵ and were “anxious about the risk of being colonized by Western powers.”²⁶ The example of Egypt, which had fallen prey to foreign powers after default, was “constantly held up”²⁷ in policy discussions. Aversion to external finance relaxed during the war with Russia (1904–5) because military expenses could not be financed without major loan proceeds. Between 1904 and 1905, Japan raised £107 million in Europe.²⁸

Loans were initially floated in London, but Paris and Berlin joined after the turn of the century. The first £1 million loan was issued in April 1870, carrying a 9 percent effective interest rate (about 200 percent higher than consol yields at the time).²⁹ Over time, loans grew bigger and the rates more competitive, remaining under 5 percent after 1897. The adoption of the gold standard in 1897 and victory over Russia in 1905 strengthened the creditworthiness of Japan in European financial capitals.³⁰ That was also reflected in the bond maturity, between 13 and 25 years prior to 1894 and about 60 years thereafter.³¹

Japan met its foreign obligations scrupulously. What explains the pristine fiscal behavior of Japan? Geographic scale and domestic credit, namely, conditions that helped war make states in Western Europe.

Geographic Scale

In comparing the divergent paths of China and Japan, Koyama, Moriguchi, and Sng point to the smaller size of Japan as a facilitator of military and fiscal centralization.³² The relatively small scale increased the efficiency gains of common defense relative to a decentralized structure (the status quo) and reduced collective action costs of building and enforcing the new fiscal apparatus.³³ Despite disagreement on the speed and method of reform and frequent intraelite disputes, Meiji leaders agreed on the benefits of pooling military and fiscal resources to secure sovereignty.³⁴

Political and fiscal centralization was not exempt from renegotiations, trial and error, and tensions within the elite and the general populace. Tax increases and mass conscription by the central government soon led to popular demand for an elected national assembly.³⁵ The promulgation of a Prussian-style constitution in 1889 was arguably a “tactical concession” to the rising urban class, excluded from the circles of power.³⁶ Franchise for the new Diet remained restricted to big taxpayers, and liberal rights (e.g., freedom of expression) required the consent of the Imperial Diet.³⁷ These were, however, standard provisions in other advanced economies at the time.³⁸

The Meiji constitution was far more consequential for the balance of power between competing elite factions, which rapidly coalesced into two large parties, Liberal and Conservative.³⁹ Under the new constitution, the Diet was endowed with taxation and expenditure powers (other than military outlays) and the executive had to gain the legislature’s approval to pass the annual budget.⁴⁰ This power-sharing mechanism set the stage for compromise. For instance, after the war with China, a tax increase was negotiated with the Liberal opposition after expansion in infrastructure spending (of the latter’s liking) had been agreed upon. The “power of the purse” turned out to be a key source of power of the Diet vis-à-vis conservative and militarist executives appointed by the emperor.⁴¹

Fiscal reform and political stability in a context of external menace was a delicate equilibrium to keep, and the relatively small scale of the country combined with good roads and maritime transportation facilitated elite coordination and rapid suffocation of local insurrections.⁴² Not coincidentally, small scale was also a key factor in explaining the rise and persistence of power-sharing institutions in Western Europe.⁴³

Domestic Credit Markets

Public credit was not new in Japan. The financial institutions in the Meiji period were largely inherited from the Tokugawa shogunate. What is more, the armed overthrow of the old regime in 1868 was financed with loans from big local merchants, or zaibatsu.⁴⁴ From the beginning, these centenary conglomerates (e.g., Mitsui, Kōnoike, and Yamaguchi) were embedded in the financial structure of the new regime. In the first decades of the restoration, they assumed responsibility for tax collection outside the capital, a role they kept until the National Tax Agency was ready to do the job.⁴⁵ The zaibatsu also helped build up public banking. The Mitsui group, for instance, funded (along with Ono) the first national bank in 1873, which was granted a monopoly on banknote issue. Three years later Mitsui established the largest private bank in the country.⁴⁶ Not surprisingly, big merchants were close to political power and sponsored the careers of top politicians.⁴⁷

Even though Japan borrowed overseas, domestic loans took a prominent role in public finance. Until war with Russia, external finance represented less than 20 percent of long-term government debt. After war with Russia broke out in 1904, external loans gained weight in total public debt, as reflected in figure 9.1. In 1914, that ratio reached its maximum, 60 percent, and declined afterward.⁴⁸ The great importance of domestic credit in funding the early decades of the Meiji period played a key role in securing fiscal discipline. Suspending debt service (internal or external) would have reduced government funds substantially, stressed domestic credit markets, and cost political support of the new regime. In Japan, financial oligarchs played a role similar to that of cabal tax farmers in seventeenth-century France:⁴⁹ that is, keeping the feet of the sovereign close to the ground in matters of fiscal policy.

FIGURE 9.1. Foreign Public Debt as Percentage of Total Public Debt in Japan. Data drawn from the Bank of Japan (1966, p.158). From 1868 to 1870, data for domestic bonds are missing, hence the high ratio.

Local finance was also important for its role in compensating the losers of the Meiji Restoration: the samurai and local notables in the Tokugawa era. In 1871, following the elimination of the feudal states and the samurai monopoly of military and administrative positions—a “hereditary caste system”⁵⁰—these two groups were compensated with a stipend in rice and government bonds.⁵¹ Initially, the ex-samurai and their families (comprising two million people in total) were generously compensated with a pension, but that policy dragged the national budget down—it consumed 30 percent of ordinary expenses in 1873.⁵² The stipends were commuted for government bonds in 1876.⁵³ The government created a special bank to guide the ex-samurai in their investments, and the wealthier members put their money in the new financial institutions of the country.⁵⁴ As a result, Japan saw a dramatic expansion of private banks, from 7 to 150 branches within two years.⁵⁵

In sum, domestic bonds were strategically granted to develop a vested interest in economic growth and political stability among the losers of the Meiji reform.⁵⁶ What was good for the country’s finances was good for the ex-samurai.⁵⁷ By the same token, avoiding suspension of debt service was of utmost importance to please the social and political foundations of the new regime. Much as had happened in Great Britain and the Netherlands,⁵⁸ capital markets in Japan aligned the interests of winners and losers of reform and infused support for financial probity and continued investment in tax capacity.

9.1.3 APPRAISAL AND A SHADOW CASE: ARGENTINA

Japan had the right conditions to connect foreign threats to state building. It was relatively small and had levels of capital accumulation that enabled domestic public credit, government accountability, and investment in tax capacity to honor debt. Did other countries follow a similar state building trajectory? Argentina is a good candidate. On the eve of World War I, this Latin American republic was a sovereign and wealthy economy often compared to British offshoots.⁵⁹ Yet Argentina’s prosperity turned out to be a giant with feet of clay. Its economic vigor faded away as foreign debt piled up. Why did it end that way?

Following independence from Spain in the 1810s, Argentina experienced a series of regional interstate and civil wars requiring vast mobilization of domestic and external resources.⁶⁰ Pacification in the 1860s gave way to (limited) political centralization, the adoption of a liberal constitution, and state building.⁶¹ Broadly speaking, Argentina walked path A of state building for decades after independence. Thereafter and gradually, Argentina became a pole of attraction of foreign capital. But the boom came only in the 1880s: within 10 years, British investment in Argentina grew from £25 million to £150 million, the latter being a lower-bound estimate.

The British investment during the 1880’s expanded at a rate astonishing by standards of that age and greater than during any subsequent decade. The year 1889 was, indeed, an annus mirabilis when Argentina absorbed between 40 and 50 per cent of all British funds invested outside the United Kingdom.⁶²

Despite the potential benefits of public investment,⁶³ external debt service became unmanageable, consuming 50 percent of export revenue—a critical measure of debt sustainability, according to Flandreau and Zumer.⁶⁴ Default followed in 1890, causing the Baring Crisis, a major crisis in financial history. In 1900, after a long cycle of debt restructuring was completed, outstanding debt had increased tenfold relative to 1880.⁶⁵ Debt service had risen to a point that Argentina became a net capital exporter by the end of the decade.⁶⁶ The new capital inflows were not for productive purposes either. Every new loan between 1890 and 1914 was to wash out old debts, including the liquidation of the railway guarantees to British investors.⁶⁷

Economic austerity in the 1890s was followed by a period of sustained growth, the Belle Epoque, 1900–1914. These years were characterized by an export boom that sanitized the national budget. Despite improvements, fiscal deficits remained the norm (unlike Japan),⁶⁸ debt service consumed at least twice the resources in Argentina as in Japan (figure 9.2a), and the ratio of total public debt to revenue remained twice the size of Japan’s (figure 9.2b).

The origins of debt were also starkly different: whereas external debt in 1914 in Japan represented an all-time-high 60 percent of total public debt (see figure 9.1), that level was still a fraction of Argentina’s 86 percent.⁶⁹ The lack of domestic credit markets in Argentina—an old problem⁷⁰—pushed the government back to external markets (New York, specifically) right after WWI.⁷¹ Total debt nearly doubled between 1920 and 1930, increasing from 850 million to 1,600 million pesos. More than 60 percent of debt contracted in that decade was still used for nonproductive purposes: refinancing old debt, armaments, and unbudgeted expenses.⁷²

External debt is arguably not the only cause of Argentina’s economic decline, but it played a key role.⁷³ The fiscal imbalance generated by overborrowing in the 1880s was never fully addressed. Access to external capital (even if only to wash out old debt) kept tax reform to a minimum.⁷⁴

FIGURE 9.2. Public Debt in Japan and Argentina before 1914. Data drawn from Ferguson and Schularick (2006).

Argentina’s underinvestment in tax capacity is no surprise in light of the political economy of public finance elaborated in chapter 2. Japan’s commitment to fiscal discipline is. Preexisting debt markets surely played a key role in keeping Japan off a foreign debt trap during critical stages of state building. Chance might have played a role too. By 1914, external service was rapidly accelerating in Japan. To avoid debt service suspension, the Ministry of Finance had to be bailed out by the Bank of Japan and Yokohama Specie Bank.⁷⁵ Increased exports stimulated by war demand and subsequent tightening of international credit helped Japan refocus on domestic resource mobilization. “Japan was lucky”⁷⁶ that the international credit bubble burst before it was too late.

9.2 Siam

In the early 1870s, Siam was not a territorial state proper. Bangkok maintained tributary relations with the periphery, a common power structure in Asia known as a mandala state. The country had no standing military or common currency. And yet by 1914 Siam had become a centralized entity, raised a national army, and participated in international trade. The rapid overhaul of the country was a response to external threats and primarily involved investment in bureaucratic capacity. These changes were purposively undertaken without resorting to external capital, considered by local elites as a form of subjugation to Western powers.⁷⁷ Consistent with the bureaucratic channel of persistence, areas of Siam that were centralized early had a stronger bureaucratic apparatus as early as 1917 and as late as 2000.⁷⁸

The emphasis on building a strong but unaccountable Leviathan came with strings attached. The very same civil servants that the Chakri dynasty had recruited and nurtured for 60 years terminated the absolutist era in 1932, replacing it with a bureaucratic regime. Following the 1932 revolution—and arguably until the present day—different factions within the bureaucratic apparatus have vied for power, welcomed external finance, and limited opportunities of political participation to the populace.

9.2.1 FOREIGN THREATS AND STATE BUILDING

Although Siam never lost national sovereignty, the risk of colonial occupation intensified in the middle of the nineteenth century. The British had defeated the Chinese in the First Opium War (1839–1842), and Burma—Siam’s regional rival—followed suit in 1852. The French occupied Cochin China in 1861 and pressed Siam from bordering Cambodia. Despite multidirectional threats, Siamese rulers were able to play British and French colonial ambitions against each other and secure for itself buffer state status between both powers.⁷⁹

The foreign menace compelled the Chakri dynasty to put forward a battery of administrative, fiscal, and military reforms. The task was daunting because the playing field was not level. To preempt foreign intervention, King Mongkut (r. 1851–1868) signed the 1855 Bowring Treaty with the British. The treaty was meant to open the Siamese economy to foreign competitors. Among the many clauses, it capped tariffs at 3 percent, hence precluding the ability to use trade taxes as a source of revenue. The treaty also banned any modification of the land tax rate and internal tolls as well as the creation of new taxes.⁸⁰ Revenue, badly needed to build a new army, could grow only from better enforcement of existing taxes on land, state monopolies, and forced labor, or corvée. And that is what happened.

King Mongkut initiated a battery of reforms, but his son and successor, King Chulalongkorn (r. 1868–1906), was responsible for the giant leap forward in fiscal capacity. He reformed the entire government and bureaucratic structure as a means of fiscally centralizing the state. New ministries were created, the king’s personal finances were separated from the general revenues, auditing techniques were incorporated, and annual budgets were first drafted and published.⁸¹ Between 1868 and 1915, tax revenue increased almost tenfold, from 8 to 74 million baht.⁸² Fiscal discipline became a matter of national security. The king was wary that economic distress would encourage international powers to take over the country, as they had done with China.⁸³ Between 1850 and 1922, Siam enjoyed a fiscal surplus every single year. Fiscal discipline implied that productive investment (e.g, roads, ports) was executed piecemeal. No risks were taken.

Domestic loans were not an option to fund government—a local credit market would not exist until after the Great War.⁸⁴ Between 1905 and 1925, Siam floated five loans overseas for a total of £13.6 million, 44 percent of which was used to reinforce credit instead of domestic investment activity.⁸⁵ These loans turned out to be extremely political, with British, French, and German representatives competing for access, which reinforced the kings’ fears of external finance. Low reliance on foreign credit slowed down economic progress, but for that very reason it compelled the Siamese kings to undertake ambitious, self-strengthening reforms that increased state capacity in the short and long run.

9.2.2 CENTRALIZATION AND BUREAUCRATIC GROWTH

Tributary governance in Siam had never required central government presence outside Bangkok, but that changed in the mid-nineteenth century. Kings Mongkut and Chulalongkorn understood that national sovereignty required securing the outer frontiers, and to that end they replaced local political and administrative elites on the frontier with loyal delegates and career bureaucrats.

Administrative reform was initiated in 1873 with the creation of the central government Revenue Office, to which regional tax farmers directed local revenue. The Audit Office, inaugurated in 1874, was intended to keep tax collection under the tight supervision of the central government and limit embezzlement and corrupt practices by regional tax farmers and elites.⁸⁶ Shortly thereafter, central government commissioners were deployed in the provinces to directly supervise the collection from tax farms. In 1875, the government founded the Survey Division, which created the first complete map of Siam by 1897, enabling the government to set up telegraph lines linking it to areas under external pressure.⁸⁷ To radiate state power further, in 1887 a new Department of Education was inaugurated, enabling the expansion of public education, and new military and survey schools were opened to recruit military and civil officials.

Fiscal and bureaucratic reform extended the king’s grip over the territory against the will of regional leaders. To overcome resistance, King Chulalongkorn raised a private professional army of 15,000 troops and 3,000 marines, financed with the monies collected by the new Revenue Office.⁸⁸ Despite significant progress, the war with France in 1893 was a warning call for the king. The country remained powerless against European military might. Fiscal and political centralization accelerated thereafter,⁸⁹ and to that end the cabinet was reorganized into 12 specialized ministries, including the powerful Ministries of Finance⁹⁰ and the Interior,⁹¹ which shared responsibilities for tax collection.

The Ministry of the Interior assumed the production of the first modern census, conducted at the provincial level in 1903 and at the national level in 1910.⁹² Censuses were not new in Siam. They had been crucial for the corvée, conscription, and taxation.⁹³ However, the new modern techniques applied in the 1910 census perfected the ability of the central government to “see like a state.”⁹⁴ To supply the new bureaucracies with qualified officials, new professional public service schools were inaugurated in 1899.⁹⁵

Bureaucratic reform put forward in the long nineteenth century had lasting effects—some good, some bad. On the positive side of the balance, advances in the infrastructural power of the state increased short- and long-run economic output and human capital: exploiting historical geographic variation, Paik and Vechbanyongratana show that provinces that were centralized early on were those exposed to higher external threats. They find that centralization was manifested in higher density of the rail line and larger presence of public schools and teachers by 1917. Those differences remained in the year 2000.⁹⁶ In other words, early bureaucratic reform had persistent positive effects on state capacity. The strong emphasis on a strong but unaccountable administration, however, led to the demise of the absolutist regime as well as the democratic era that briefly followed it.

9.2.3 A SHORT DEMOCRATIC SPRING

By renouncing external finance, Siamese rulers were compelled to put forward a battery of bureaucratic innovations to secure government funds with domestic resources, but no political change followed. Quite the contrary, King Chulalongkorn’s policies were meant to consolidate central power over a constellation of tributary states. What Chulalongkorn did not anticipate is that his successors would lose control over the bureaucracy that he and his father had put in place.⁹⁷ A coalition of new urban classes and career officials unsatisfied with nepotism led a revolution in 1932 that ended with the abdication of King Prajadhipok (r. 1925–1935), the promulgation of a constitution, and national elections.⁹⁸

Demands for limited government were not new in Siam. In 1885, Western-educated elite members petitioned the king for a constitutional monarchy emulating the British model. Coups to replace the monarchy with a constitutional government were aborted in 1912 and 1917.⁹⁹ Unlike during previous coup attempts, the financial position of the country in the early 1930s was in dire straits. Global demand and trade tax revenue plunged following the crash of 1929.¹⁰⁰ To finance the deficit, King Prajadhipok considered floating a loan overseas, but the terms were unbearable.¹⁰¹ Effectively excluded from credit markets, the king proposed the implementation of a general income and property tax. The new tax followed a public petition in the Bangkok Times, the leading journal in Siam, which recommended heavier taxes on the wealthy and more government spending to palliate economic distress.¹⁰² The princes in the Supreme Council—a consultation body that the king had created in 1926—flatly rejected the income tax by arguing that it would hit their fortunes hardest. Pressed from above and below, the king opted for a compromise: the income tax was adopted, but key sources of wealth remained exempt to minimize opposition from the rich. To balance the budget, government spending was cut by reducing salaries of civil servants and slashing the military budget. Effectively, the income tax shifted the tax burden onto the urban middle class and penalized civil servants.¹⁰³

Public criticism to fiscal policy grew stronger. The Bangkok Times denounced the passing of an “unfair tax” for the middle class and raised issues of “taxation without representation.”¹⁰⁴ The king sought to appease popular opposition by passing a constitution that allowed for some “degree of representative government without unleashing forces of radical change.”¹⁰⁵ It was too late. The king was deposed soon after by a diverse coalition comprising nonroyal military officers, civilian bureaucrats, and urban dwellers, whose only common goal was to “strip the throne of its powers and creat[e] a constitutional government.”¹⁰⁶

9.2.4 A LONG BUREAUCRATIC WINTER

The limited opportunities to participate in politics recognized by the 1932 constitution placed political power in the hands of state bureaucrats—the very same officials that the monarchy had nurtured for over 50 years.¹⁰⁷ The working class was excluded from the circles of power, and there was no room for career politicians either. In the decades that followed, civil and military officials held a virtual monopoly on positions in the cabinet and a majority in the national parliament.¹⁰⁸

Career officials were divided into two rival groups: those in favor of a constitutional government and those in favor of military rule.¹⁰⁹ Relentless competition for power within the state apparatus was manifested in rapid government turnover: from 1932 to 2006, Siam (Thailand after 1939) went through 20 constitutional texts, 36 prime ministers, and endless coups and autocoups (some successful, others not). The common denominator of all administrations was their appreciation for self-indulgency. The Ministries of the Interior and Defense alone consumed on average 34.5 percent of the national budget.¹¹⁰

As years passed, Thailand became a paramount example of an inefficient but persistent state, as defined by Acemoglu, Ticchi, and Vindigni(namely, a coalition between bureaucrats, state, employees, and plutocrats, united against democracy and wealth redistribution).¹¹¹ Consistently, little attention was paid to the working class and farmers in the countryside. And despite sustained economic growth, no major investment in infrastructure or improvements in fiscal capacity occurred after World War II.¹¹²

To minimize social contestation, tax pressure remained low. Tax revenue as a percentage of GDP grew from 4.9 percent to 12.3 percent from 1950 to 1978,¹¹³ but remained considerably low by regional and international standards.¹¹⁴ Tax receipts grew momentarily before the financial crisis of 1997, but returned to preboom times soon after, stabilizing at around 15 percent of GDP.¹¹⁵

To fund the government, postrevolutionary administrations welcomed foreign capital, hence deviating from their absolutist predecessors. Loans and aid from the United States flowed in the 1950s.¹¹⁶ The International Bank for Reconstruction and Development and the Commonwealth countries and Japan (the Colombo Plan) chipped in with developmental programs.¹¹⁷ International aid proved largely inefficient because the programs prioritized foreign military interests over local needs.¹¹⁸ Besides, aid money in the hands of Thai officials often ended up in blatant corruption: “The generals focused on dividing up the spoils of the massive dollar inflows and the resulting increase in government budgets and business profits.”¹¹⁹

Along with international aid, external public debt grew after WWII. As a percentage of GDP, foreign debt quintupled between 1970 and the late 1980s.¹²⁰ Strong dependence on foreign capital in the public and private sectors led to two financial crises, one in the 1980s and another in the 1990s. Massive unemployment and poverty followed.¹²¹ Afterward, spending austerity, low taxation, and political instability remained the norm.

9.2.5 APPRAISAL AND A SHADOW CASE: ETHIOPIA

After seven decades of sustained bureaucratic strengthening, the Chakri dynasty had built one of the strongest Leviathans in all of Southeast Asia.¹²² The Crown’s early success, however, contained the seeds of its own demise. In the “bureaucratic polity”¹²³ that followed absolutism, political effort was put on seizing and keeping power. Fiscal orthodoxy and external dependence were relaxed, preempting major advances in state capacity.

Siam illustrates the dilemmas and limits of building a strong bureaucratic state without a proper system of checks and balances. Coercion can secure tax compliance up to a point; however, compliance with higher rates is hardly implementable without securing consent—and for that, political change is required. In the nineteenth century, Siam lacked a mercantile class capable of extracting concessions from the king in return for tax compliance. Long distance, rugged terrain, and poor means of communication did not allow peripheral leaders to coordinate and negotiate terms of fiscal centralization. Absolutism followed.

The case of Siam shares important characteristics with the only African country that escaped European colonization in the nineteenth century: Ethiopia. This country was big (about 1.7 times the size of France), poor, and ethnically diverse. Threats of foreign invasion propelled state building efforts involving virtually no external finance.¹²⁴ And bureaucratic strengthening received most of the attention. Unlike Siam, Ethiopian rulers succumbed too soon to the temptation of external finance, pushing their country into a debt trap and state weakness that persist today.

Although Ethiopia had a centenary tradition of statehood, the modernization of the state apparatus accelerated in the last decades of the nineteenth century primarily because of war considerations. State reform was implemented by Emperor Menilek II (r. 1889–1913), who had accessed the throne after two decades of civil war. Seeking to build a modern nation-state, he created a national currency, revamped the taxation system, introduced Western-style property inheritance law, established a cabinet system of government, opened modern schools and hospitals, and adopted the telegraph and telephone, among others reforms.¹²⁵ The military also received Menilek II’s attention: modern weaponry (rifles, cannons, ammunition) were imported from France, Italy, and Russia and paid for partly in cash and partly in specie: ivory, gold, and civet.¹²⁶ To make reforms self-sustaining, Menilek II ruled key parts of the empire only indirectly, allowing local rulers to retain power in return for taxes and tributes.¹²⁷

The Horn of Africa was a key geostrategic position for trade routes with Asia and within Africa. Italy, the main European power in East Africa as of the Berlin Conference (1884–1885), sought to gain the sympathy of the new Ethiopian emperor. In 1889, the two countries signed the Treaty of Wuchale, and as a sign of goodwill, the Italians offered a loan to Menilek of 4 million lire ($800,000), half of it to acquire military equipment.¹²⁸ The loan carried extreme conditionality: it was secured by the customs revenue from the city of Harar, which would pass into the hands of Italy should Menilek default on external debt.¹²⁹

A disagreement about the key stipulations of the treaty—Had Ethiopia become an Italian protectorate upon its signature?—convinced Menelik II to terminate the relationship with the Italians. By 1893, he had returned the loan to safeguard independence.¹³⁰ Further disagreements led to the First Italian-Ethiopian War of 1895–1896. The Italians mobilized 20,000 troops, half of them African. Menelik II mobilized over 100,0000 men, including 80,000 riflemen, 8,600 cavalry, 32 artillery and machine gun batteries, plus 20,000 hangers-on armed only with spears, lances, and swords.¹³¹ To finance the increased expenses of war, a new tax on wealth and land was levied on farmers.¹³²

Ethiopia won the war against the Italians and confirmed its independence for years to come. To avoid tripping over the same stone twice, Menelik II closed the country to external capital.¹³³ By 1914, Ethiopia was not a modern Weberian state, but the fiscal efforts made during Menelik II’s tenure were fundamental to fund economic modernization, continue the arms imports from Europe, and initiate a second phase of bureaucratic modernization after his passing.¹³⁴

Why did Ethiopia become one of the world’s poorest countries? Some responsibility lay in external finance in the second half of the twentieth century. After WWII, Haile Selassie (regent 1916–1930; emperor 1930–1974) made economic modernization a priority. Because military expenses consumed most domestic funds, he turned to international markets to finance developmental programs.¹³⁵ Haile Selassie soon realized that he could secure military aid from the West by exploiting the geostrategic value that Ethiopia had acquired in the Cold War era.¹³⁶ In 1959, for instance, he threatened to accept $100 million from the Soviet Union unless the US did not commit to a new military outlay. Between 1950 and 1970, Ethiopia received $200 million from the US and $121 million more from the World Bank.¹³⁷ By 1970, almost two-thirds of total US military aid to Africa was allocated to Ethiopia.¹³⁸

In addition to military aid, Haile Selassie negotiated bilateral and multilateral loans from official creditors.¹³⁹ Loans were often offered on concessional terms (i.e., with conditions more favorable than those offered by the market) as part of official developmental aid (ODA). Between 1960 and 1974, ODA loan issue alone grew by 250 percent in constant prices.¹⁴⁰ External funds became important for the emperor and enabled a period of “personal rule,” which gradually eroded “governmental efficiency.”¹⁴¹

While external capital poured in, tax reform came to a halt—much like in Siam. Some half-hearted efforts were made under Haile Selassie.¹⁴² The land tax was reformed in 1944, but it did not end with the informal control of landed elites over collection, and receipts declined over time; corporate taxation was sliced to attract foreign direct investment;¹⁴³ and the new income tax passed in 1966 was systematically eluded by the urban elites. Tax reform failed because Haile Selassie sought to increase the tax pressure while retaining full power over fiscal policy.¹⁴⁴

A Marxist revolutionary junta deposed Haile Selassie in 1974. When the new government approached the USSR for support, the latter flooded the country with fresh military aid, including heavy subsidies to wage war against Somalia in 1977–78.¹⁴⁵ When the West resumed aid programs in the 1980s, fresh cash was often diverted for clientelistic purposes or captured by regional insurgents.¹⁴⁶ To balance the central government budget, the junta issued new external loans: by 1988, debt service consumed $530 million a year, a tenfold increase relative to 1974.¹⁴⁷ In the meantime, the military share of the budget had grown from 18 percent in 1974 to 50 percent in 1988.¹⁴⁸

The military regime collapsed in 1991, and a (highly imperfect) parliamentary regime was inaugurated. External debt generously surpassed 100 percent of GDP for most of the 1990s, and aid kept coming at faster rates than ever.¹⁴⁹ Since 2000, Ethiopia has been part of the group of highly indebted poor countries (HIPCs) and receives regular assistance from the IMF and the World Bank.¹⁵⁰ Despite recent progress in tax collection, Ethiopia relies on loans and international aid to finance its budget deficit, remains at the head of sub-Saharan African economies in terms of per capita ODA, and is experiencing a rapid acceleration of public external debt relative to GDP, revenue, and exports.¹⁵¹

All in all, Thai and Ethiopian rulers in the twentieth century did not share the diplomatic finesse and time horizons of their predecessors. Accelerating after WWII, Thai and Ethiopian rulers succumbed to the temptation to float external loans and actively searched for international aid. In both states, external finance reduced the impetus to keep building states. When that happened, both countries were at different stages of state building, allowing Thailand to use external funds to grease its strong bureaucratic apparatus and avoid the foreign debt trap and state failure experienced in Ethiopia.

9.3 Chile

The cases I have focused on so far either followed one trajectory of state building from the nineteenth century onward (i.e., Japan) or switched gears along the path favoring external funds (i.e., Argentina, Ethiopia, Thailand). Two questions follow: One, do countries hold any (unobserved) characteristic (e.g., cultural trait, colonial legacy) that makes them more likely to choose and remain on any given path? Two, can states jump into a positive state building trajectory halfway through the game? To address these questions, I examine longitudinal variation in fiscal capacity in Chile, a sovereign country that committed to state building only in the last decades of the nineteenth century, when leaders were compelled by circumstances to mobilize domestic resources for war.

Chile was a relatively small country with mercantile elites concentrated in two major cities, Santiago and Valparaíso, 70 miles apart and connected by telegraph (1851), railroad (1863), and telephone (1880). These favorable conditions enabled economic elites to coordinate, extract, and enforce power-sharing institutions at the time of domestic resource mobilization. Borrowing from empirical strategy in chapter 7, I show here that major tax reform in Chile took place when the government ran out of options. Wartime fiscal efforts activated both the bureaucratic and political mechanisms of transmission, growing state capacity in the long run.

9.3.1 CHILE AT WAR

Chile gained independence from Spain in 1826 after 16 years of war.¹⁵² Chile was never of paramount importance for the Spanish Crown, which was more invested in Peru because of its natural resources.¹⁵³ Upon independence, Chile inherited a rather limited state administration with low capacity to raise taxes. Still in 1826, Chile suspended debt service on the only loan it had issued in foreign markets and aimed at funding military expenses.

FIGURE 9.3. Tax Revenue in Chile in the Long Nineteenth Century. Data drawn from Wagner, Jofré, and Lüders (2000).

The War of the Confederation (1836–1839) was the first interstate war waged by Chile as a fully sovereign state. The relationship between Peru and Chile had deteriorated since their split from Spain. Peru failed to repay a loan from Chile to fight Spain, and both countries engaged in a tariff war in the early 1830s. In 1836, Peru and Bolivia formed the Bolivian-Peruvian Confederation. Chile read the move as a direct challenge to its desired hegemony in the South Pacific. That year the confederation also sponsored a failed expedition led by an exiled Chilean general aimed at ousting the Chilean president. This was the onset of a three-year war.¹⁵⁴

The War of the Confederation had moderate fiscal effects for Chile, as shown in figure 9.3. Based on my calculations, the war cost was 3 million, equivalent to 25 percent of the ordinary annual receipts. War expenses were financed with taxes and domestic credit, the latter playing only a minor role.¹⁵⁵ Tax receipts were raised from customs (over 60 percent of total revenue), excises, and mining receipts. The war coincided with the tenure of Renjifo and Tocornal, two orthodox finance ministers who reshuffled the tax system twice to balance the budget. In 1837, the four ministries (interior, justice, finance, and war) were restructured and given specific functions as part of an integral plan of financial reform,¹⁵⁶ and in 1839, customs duties were marginally raised to cover additional war expenses.¹⁵⁷

The budget, balanced during wartime with only a fifth of a percentage point deviation over the GDP in 1839, remained stabilized or in surplus during the next 15 years; and tax revenue increased by 50 percent, although from a very low base. The main impact of the War of the Confederation was arguably political. Bringing much political stability in the decades that followed, the war unified conservative families and forged a national spirit among elites and nonelites alike.¹⁵⁸ Centeno summarizes the effect of the War of the Confederation in these words: “If any war ‘made’ Chilean exceptionalism, it was this one, as it provided a rare legitimacy while also establishing a stable civil-military relationship.”¹⁵⁹

In 1842, a healthy financial position allowed the Chilean government to settle the debt that had been in default since 1826. In the early 1850s, significant tax reform took place with the adoption of la contribución territorial, a new land tax that required the assessment of property holdings by the state.¹⁶⁰ Revenue stemming from these taxes was, however, largely insufficient to meet the expenses of the next interstate war fought by Chile in the nineteenth century: the Chincha Islands War, also known as the Spanish-Chilean War. The archipelago, located about 20 miles off the southern coast, held Peru’s largest deposit of guano, a highly effective soil fertilizer in high demand in Europe and considered “more precious than gold.”¹⁶¹

The Chincha Islands War (1864–1866) was initiated by Spain as part of a new, aggressive offensive in imperial foreign policy led by Queen Isabella II. The pretext was the death in Peru of some Spanish agricultural workers after marching for improvements in working conditions. A Spanish naval squadron occupied the Chincha Islands in retaliation. From that position of force, Spain negotiated concessions from the Peruvian government. Following pro-Peruvian comments in the Chilean press, the Spanish bombarded the coastal city of Valparaíso.¹⁶² When Chile rapidly organized an international coalition with Bolivia and Ecuador to fight Spain, the allied forces contained Spain’s ambitions to regain colonial influence in the region. The Spanish navy soon realized that they could not win the war despite having more than twice the cannons of Chile and Peru combined. The cost of war for Chile was 32 million, twice annual ordinary receipts. In order to fund war expenses, Chile floated three loans in London.

After the war, Chile was able to honor external debt from ordinary receipts. No major tax reform followed.¹⁶³ In the early 1870s, the global recession caused a marked reduction in customs receipts. In order to balance the budget, the Chilean government floated three new external loans between 1870 and 1875. Debt service then became onerous, consuming roughly a third of tax revenue.¹⁶⁴ Chile was on the brink of default in July 1878, and rumors extended to London that Chile would suspend the sinking fund payments. Despite an initial denial, the Chilean government announced the suspension of amortization in April 1879, days after a new war with Bolivia and Peru had begun.

Excluded from external capital, Chile waged the third, final, and largest interstate war of the nineteenth century: the War of the Pacific (1879–1883), which was essentially about the control of nitrate fields in the desert of Atacama.¹⁶⁵ This territory, one of the driest in the world, has perfect conditions for the natural production of salitre, a nitrogen-based fertilizer used in agriculture and munitions production in Europe. The Atacama Desert, which incorporated the fields of Antofagasta and Toco, was located in Bolivian national territory; however, most of the extractive companies in the region and 90 percent of the population were Chilean.¹⁶⁶ In 1879, the Bolivian government increased unilaterally the export duties of salitre, which contravened an agreement signed in 1874 not to raise taxes on any Chilean corporation mining in Atacama for a period of 25 years.¹⁶⁷ This incident triggered war with Bolivia as well as Peru because these two countries had signed a military agreement of mutual defense against Chile in 1873.

The war lasted four years. The first two years involved traditional army-to-army combat; the last two involved guerilla warfare in Peru and Bolivia, resulting in most of the Chilean casualties. Eventually, Chile prevailed and annexed the Bolivian province of Atacama plus the Peruvian province of Tarapacá—the jewel in the crown of the salitre mining industry.

War mobilization was significant for the three countries involved: 2 percent of Chilean male adults were called to arms; more than 1 percent of Peruvian male adults and more than 2 percent of adult male Bolivians were drafted.¹⁶⁸ Belligerents put into action the new rifles, artillery, guns, and ironclads purchased for the fleet after the Chincha Islands War. The total cost of the war for Chile was 75 million,¹⁶⁹ twice the cost of the war against Spain 15 years earlier. Lacking external funding, the Chilean government sought to float domestic bonds, but this operation failed. The domestic banking sector was still recovering from the 1870s crisis—all but one of the national banks were insolvent—and denied the government capital.¹⁷⁰ Credit constrained, the government decided to abandon convertibility and reluctantly issued paper money, doing so three times during wartime, commencing in April 1879. In total, Chile issued 28 million in paper money, which paid for one-third of war expenses.¹⁷¹ The remainder was paid with tax money.

Prewar tax receipts fell short. Pressed by growing military expenses, the Ministry of Finance pushed for the tax reform that had failed the year before: “In May of 1879, in desperation, Congress passed the mobiliaria, the income tax it had rejected the previous year.”¹⁷² The mobiliaria was a tax on capital gains, certain types of securities, and all income exceeding 300. Essentially, it was a tax on the rich—hence a tax on sitting deputies. Despite high levels of evasion in its first year of implementation, the income tax (together with the inheritance tax adopted one year earlier) became by 1883 the third most lucrative tax, following only customs and state monopoly revenues.¹⁷³

Following Chile’s seizure of the two nitrate fields in Atacama—Antofagasta and Toco—plus Tarapacá, the export tax rate quadrupled uniformly across the country, hitting new and old firms in the Chilean territory, including the Antofagasta Nitrate and Railway Company, the largest conglomerate in the recently annexed territory. The new rate was set at an unprecedented 12 percent of the company’s profit. The nitrate tax legislation passed despite the strong political ties of this company: 11 of its shareholders were deputies or senators, including two members of the cabinet.¹⁷⁴ In that regard, Sater writes:

The passage of the nitrate export tax surprised many. Powerful forces had done everything, including trying to buy votes in the Chamber of Deputies, to stop the nitrate levy [of 1880] from becoming law. Even the normally blase Chilian Times appeared stunned: “Large sums of money and the influence of many of the most important men in the country have failed to prevent the bill from passing a very large majority. Nearly all the papers in the country had been bought in vaine: influence, generally so potent in this country, could do nothing.”¹⁷⁵

Annexing Atacama and Tarapacá, Chile became the world monopolist of salitre. Propelled by the new levies on nitrates, export receipts became the first source of revenue.¹⁷⁶ In four years, exports doubled and revenues increased by approximately 500 percent.¹⁷⁷

9.3.2 CHILE AND THE POLITICAL ECONOMY OF EXTERNAL FINANCE

In the previous section, I suggested that war finance was conditioned on the availability of foreign capital. This section revisits the discussion, emphasizing the political economy of public external finance advanced in chapter 2. In light of the argument articulated there, rulers should be inclined to finance war with external loans instead of taxes, everything else being constant. Higher tax pressure might spur demands of (further) political rights for taxpayers, namely, the ability to decide on spending or new levies or both. In addition, an increase in the tax burden during war might damage the economy when resources are most needed. In light of political and economic costs, I expect rulers to consider taxation only as a last resort, that is, when they are precluded from more politically neutral options like external borrowing.

FIGURE 9.4. War Financing in Chile as a Function of External Capital Access. External public debt and tax revenue data drawn from Braun et al. (2000). War data from Wimmer and Min (2009).

War finance in Chile in the nineteenth century is consistent with this logic. Figure 9.4 plots the share of tax revenue and public foreign debt as a percentage of GDP from 1833 (earliest year) to 1913. The years during which Chile was at war are shaded. I differentiate wars fought while Chile was in default (light gray)—thus excluded from the international markets—from wars fought while Chile had access to the international credit market (darker gray).

One lesson to draw from the previous section is that war is financed in multiple ways; however, consistent with the argument advanced in chapter 2, the debt-tax mix is less favorable to taxes when rulers have access to the international credit market. Take the two larger wars—the Chincha Islands War (1864–1866) and the Pacific War (1879–1883). In 1865, Chile was allowed to borrow from international lenders, and so it did. Between November 1865 and February 1867, the Chilean government floated four war loans in London totaling 47.6 million, which grew outstanding external debt by over 300 percent with respect to prewar years.¹⁷⁸ In stark contrast, tax revenue remained virtually flat during this period, both in real terms (figure 9.3) and as a share of GDP (figure 9.4).

Things were different in 1879. This time the country was excluded from international capital markets. The government’s delegate in London tried to convince investors to float a new loan to finance war costs. All efforts were in vain: London denied credit to the Chilean government because suspended service had not yet been settled.¹⁷⁹ Chile had to mobilize resources at home. Leaving monetary policy aside, total tax revenue increased by over 75 percent within three years. Importantly, the incidence of the new taxes fell mainly on the wealthy—namely, the members of Parliament and the elites they represented.

Kurtz argues that taxation and state capacity expanded in nineteenth-century Chile because elites were fairly cohesive.¹⁸⁰ Vergara and Barros show that the socioeconomic conditions of the deputies of the three main parties in Chile (Conservatives, Liberals, and Radicals) were indeed indistinguishable among political families.¹⁸¹ Cohesion, a constant, cannot explain the change in behavior observed after 1879. Something else changed: warfare plus exclusion from international capital reshaped incentives to increase taxation among Chilean elites. Previous attempts to pass that legislation had failed because members of Congress found adoption insufficiently pressing.¹⁸² Decisive capacity building moved forward only when the availability of alternative forms of war financing was absent.

The growth of tax revenue in Chile was not merely a by-product of winning the war and seizing new sources of revenue. The war initiated fundamental political and bureaucratic reform—stronger executive constraints and administrative growth and modernization—which transformed the Chilean state well beyond the nitrate boom following the War of the Pacific.¹⁸³ Next, I elaborate on the political and bureaucratic mechanisms activated by this war.

9.3.3 TAX CAPACITY AND PRESIDENTIAL ABUSE

In 1886, a new president took office, the first one after the War of the Pacific, the Liberal José Manuel Balmaceda, well regarded on both sides of the aisle. Balmaceda put forward an ambitious program to modernize the economy—investing nitrate revenue in public works, the military, and education—so that when nitrate receipts declined, the country could easily specialize in a new competitive industry.¹⁸⁴ To coordinate his ambitious plan, Balmaceda inaugurated a new Ministry of Industry and Public Works, the apex of an overhaul of the ministerial organization, which emphasized specialization and meritocratic recruitment.¹⁸⁵ Within five years, the Ministry of Industry and Public Works doubled public investment in railroads, telegraph, and bridges. The public administration was also expanded: new hospitals, prisons, and government offices were opened.¹⁸⁶ Primary school enrollment grew from 79,000 pupils in 1886 to 150,000 in 1890.¹⁸⁷

Before Balmaceda assumed office, national defense and debt service consumed most of the budget. Under his administration, the state became actively involved in promoting economic growth by investing in infrastructure and human capital;¹⁸⁸ however, not everyone agreed with Balmaceda’s program. Conservatives preferred using nitrate receipts to retire the inconvertible paper money issued during the war, adhering once again to the gold standard. A preoccupation with the expansion of state administration grew, putting into the hands of the president the means to intensify patronage tactics to deliver electoral majorities on election day. Last but not least, the expansion of education was also perceived as a threat to the oligarchic class, whose members lacked the skills required to steer the modern economy.¹⁸⁹

Along with economic considerations, a preoccupation with the abuses of presidential power also grew. Balmaceda had assumed office promising to end the “interference” of the president in congressional elections. This was an old problem. The constitution of 1833 granted extensive powers to the executive, key among them the ability to manipulate congressional elections to build support coalitions in the legislative branch and weaken parliamentary oversight of his actions.¹⁹⁰ The web of patronage knitted by the president made Congress a secondary institution without much capacity to hold the executive accountable. The purpose of the constitutional amendments of the 1870s was to limit this form of “authoritarian presidentialism.”¹⁹¹

Beginning in 1871, the presidential term was limited to one nonconsecutive mandate. In 1874, direct elections were established for the Senate and emergency powers were restricted. “Such changes were a blow, but not by any means a body-blow to presidential power.”¹⁹² Election interference persisted—also under Balmaceda.

Soon after assuming office, Balmaceda walked away from his electoral pledge and manufactured a Liberal victory in the 1888 congressional election. He consolidated his power by removing all opposition members from the cabinet, contravening an unwritten rule in Chilean politics. Both decisions antagonized Conservatives as well as key deputies in his own party. Balmaceda’s actions in the congressional elections of 1888 were the first of many decisions aimed at weakening parliamentary oversight of executive powers.

Balmaceda created new administrative departments without due congressional approval and also antagonized nitrate producers, both British and Chilean, by entertaining the idea of nationalizing the industry. Production restrictions put in place by the nitrate oligopoly conflicted with the revenue needs of Balmaceda’s investment program. Key to understanding how events unfolded, some of the nitrate owners he alienated were sitting in Parliament¹⁹³ while foreign owners had strong connections with key members of Balmaceda’s Liberal party.¹⁹⁴

Grievances persisted when Balmaceda handpicked Enrique Safuentes to be his successor and placed him in his cabinet, blatantly contravening the original electoral platform. Only a few months later, Balmaceda put a loyal supporter of Safuentes in charge of the Ministry of Industry and Public Works, hence in command of the patronage machine. In late 1889, Balmaceda shut down Congress when one of his controversial decisions—the cancellation by presidential decree of the Nitrate Railways Company—was deemed unconstitutional by sitting deputies.

With Congress back in session in 1890, Balmaceda tried to pass a constitutional reform that would have dissolved two counterbalancing institutions in the Republic—the Consejo de Estado and the Comisión Conservadora—and established direct elections of the president with an extended mandate of six years. The reform was dismissed by Congress, but that did not stop Balmaceda in his quest for stronger presidential powers. In late 1890, Balmaceda shut down Congress a second time when his budget was denied. In retaliation, a significant group of congressmen and senators declared him unfit for office. On January 1, 1891, Balmaceda moved ahead without the approval of Congress (no longer in session) and extended the previous year’s budget, a decision that exceeded presidential powers. The country was ready for civil war: Congress fled north and received the support of the navy, the pride of the Chilean military. The president remained in Santiago, guarded by the national army. After a seven-month civil war and 10,000 casualties, the congresionistas prevailed. Having sought refuge in the Argentinean embassy, Balmaceda committed suicide.

9.3.4 CONSTRAINING THE EXECUTIVE

The road to civil war in Chile may resonate with the history of limited government in Western Europe. The accumulation of tax powers in the presidency in a context of weak executive constraints precipitated a political crisis. Tax revenue doubled during the 10 years following the last war with Peru and Bolivia. The state had assumed key functions in economic development and education ever since. By putting forward a massive program of public investment in education, military, and railroads, Balmaceda created new captive constituencies that could be mobilized to his advantage. Weak checks and balances left Congress exposed to a heightened era of executive election meddling. Staging a coup, Chilean elites sought to weaken presidential powers and made Congress the center of fiscal policy.¹⁹⁵

The 1891 civil war was not a conflict—as earlier historians like Edwards and Ramírez Necochea put it¹⁹⁶—between a president chasing the general interest and a Congress advancing the interests of an old, oligarchic regime captured by foreign capitalists.¹⁹⁷ This was a political crisis between two branches of government—executive and legislative—about the division of powers. Constitutionally, Congress had budgeting powers, but election interference allowed the president to build supportive majorities that excused him from accountability to congressional oversight. This became a major problem when the budget of the republic doubled and the state acquired an unprecedented role in steering the national economy.

“[Balmaceda’s] relation to the parliament was much like that of Charles I,”¹⁹⁸ the English monarch whose actions led to the English Civil War and eventually the Glorious Revolution. Congress accused Balmaceda of usurping its prerogatives, ruling by decree, and intervening in the electoral process.¹⁹⁹ The civil war put an end to presidential abuse. Once he was overthrown, the oligarchs strengthened the legislature by gaining effective veto power over fiscal policy. Importantly, this was a period of limited government, not modern democracy. Franchise remained restricted, and Congress neglected the needs of a growing urban working class—the so-called social question.²⁰⁰ The new political equilibrium was one in which power between the executive and the legislative branches was truly shared.

9.3.5 CONTINUED BUREAUCRATIC GROWTH

A new era known as the Parliamentary Regime (1891–1925) began after Balmaceda was deposed, and Congress and political parties became the center of political activity.²⁰¹ Congressional control over the executive was strengthened with small constitutional amendments: no public official could sit in Congress, and election monitoring was transferred to municipalities.²⁰² Both measures took away from the presidency the levers that had allowed it to interfere in national elections for roughly 60 years.²⁰³

Some argue that the weak presidencies and higher political turnover of the Parliamentary Regime stopped the economic and administrative growth initiated under Balmaceda,²⁰⁴ but Bowman and Wallerstein challenge that notion with hard data.²⁰⁵ After only three years of decline, from 1891 to 1893, public expenditure resumed both nominally and on a per capita basis and kept expanding until WWI. School enrollment continued to grow but at a slightly lower rate than under Balmaceda. Most of the investment was concentrated in public works, which benefited both the land- and mining-based elite.

FIGURE 9.5. Tax Personnel in Chile from 1845 to 1915. Data coded from national budgets between 1845 and 1915.

In order to ascertain first hand whether the investment program included bureaucratic capacity, I coded the size of the tax administration from 1845 to 1915 as reported in the national budgets.²⁰⁶ Figure 9.5 plots the total number of staff working for the Minister of Finance. Three patterns emerge: First, the Chincha War was inconsequential in terms of expanding the tax administration. This is consistent with figures 9.3 and 9.4, where no increase in tax receipts is shown during or after wartime. Second, and in stark contrast, the War of the Pacific was highly consequential for the tax administration. The personnel working for this administration grew by 83 percent between 1879 and 1885. The annexation of nitrate fields in Peru and Bolivia occurred alongside the expansion of customs services involving collecting export duties at every oficina (extraction site) and international port. Crucially, the increase in customs officials was accompanied by an increase in tax officials in other branches of the tax administration, including excise collection.²⁰⁷ Third, bureaucratic growth continued after Balmaceda’s tenure. In the early years of the Parliamentary Regime, the growth of the tax administration stopped (never declined) momentarily because the executive sought to use nitrate revenue to forge a stable monetary policy. Various attempts to burn unconvertible paper money failed, however, and within three years massive public investment resumed. So did the tax apparatus, with the adoption of new taxes to manage: alcohol (1902), insurance companies (1906), tobacco, playing cards, and inheritance (1910), and banks (1912).²⁰⁸

Under the overarching power-sharing agenda, the Parliamentary Regime put forward a program of political and fiscal decentralization. In 1893, the income, inheritance, and capital taxes adopted during the War of the Pacific were transferred to municipalities. Decentralization under the Parliamentary Regime is often criticized by historians because it put in the hands of local elites the organization of elections, causing vote buying and clientelism.²⁰⁹ On the fiscal front, however, performance of municipalities was remarkably good: total revenue of municipalities (in constant prices) almost tripled between 1902 and 1925 (earliest and latest data), and the decentralized direct taxes became the major source of local government funds, accounting for 39 percent of municipal revenue.²¹⁰

To keep municipalities in check, the central government kept veto power over the adoption and change of any existing tax rate at the municipal level.²¹¹ Present in 200 municipalities, more than 8,300 central government agents (also known as “tax police”) were granted powers to monitor the collection of municipal taxes—including a veto over any policy that could damage the national interest.²¹² State legibility was secured as well, thanks to records of economic activities, wealth, and occupation of city residents kept by the central government agents.²¹³

All in all, state building in Chile took off during the War of the Pacific and kept expanding under the Parliamentary Regime despite the nitrate bonanza and decentralization. As manifested in figure 9.6, the share of internal taxes (national and municipal) relative to total tax revenue grew over time, indicating continued efforts to expand the tax base beyond nitrate exports. On the eve of WWI, Chile had stronger executive contraints and a more capable state, namely, a strong bureaucratic apparatus capable of taxing and administering public goods and services benefiting the merchant elite, from infrastructure to education.

FIGURE 9.6. Share of Nontrade Tax to Total Tax Revenue in Chile. Nontrade tax revenue combines internal taxation and municipal taxation. Total revenue accounts for trade and nontrade tax revenue. Source: Soifer (2015, table 5.8).

9.4 Conclusion

The trajectories discussed in this chapter suggest that opportunities of state building are shaped by initial conditions (e.g., is there a mass of merchants who can negotiate the terms of taxation?), the rulers’ time horizons, access to external funds—and a grain of luck too. Take the case of Japan: it benefited enormously from external finance, but, unlike any other case in this chapter and arguably the world, it also relied on domestic capital to fund daily government expenses. Lower dependence reduced exposure to financial pressures and solidified political consensus for state building. And yet, Japan’s foreign debt rapidly escalated before WWI. Ironically, the Great War might have saved Japan from following the same path as Argentina.

Chile, the other success case, only committed to state building when its leaders were compelled to finance war domestically in the late 1870s. This case suggests that entrenched and geographically concentrated economic elites do not automatically demand power-sharing institutions. Advances in executive constraints happen when elites perceive that the Leviathan is growing too strong and endangering their economic position.

Lastly, the case of Siam speaks to the limits of building states without search for consent, a topic recently debated in Acemoglu and Robinson as well as Stasavage.²¹⁴ Coercion can be a stable, revenue-generating policy, but it secures tax compliance only up to a point. Power-sharing institutions not only transform taxation into a nonzero-sum game; they also reduce “transaction costs” of tax collection,²¹⁵ making stronger and more efficient states.

1. Refer to chapter 8 for discussion.

2. Refer to chapter 7 for quantitative evidence.

3. Refer to chapter 8 for quantitative evidence.

4. Jansen (2000, pp. 334–335).

5. Ramseyer and Rosenbluth (1998).

6. Vlastos (1989, p. 368) computes 343 peasant protests just between 1868 and 1872.

7. Kang (2020).

8. Refer to chapter 5 for details on Chinese-Western relations.

9. Suzuki (1994, p. 178).

10. Tang (2014, p. 868).

11. Sylla (2002) for the development of domestic capital markets in Japan.

12. Nakabayashi (2012, p. 388).

13. Vlastos (1989, p. 373).

14. Nakabayashi (2012, p. 389).

15. He (2013, p. 88).

16. He (2013, p. 111). Brewer (1988) and Nye (2007) for the excise system in Britain.

17. Nakabayashi (2012, p. 402).

18. Onji and Tang (2017, p. 446).

19. Nakabayashi (2012, p. 402).

20. Silberman (1993, pp. 159–168).

21. Silberman (1993, ch. 7). Ramseyer and Rosenbluth (1998, ch. 5) for a more skeptical and possibly more balanced assessment of bureaucratic independence in the Meiji period.

22. Silberman (1993, p. 166).

23. Tax and debt figures in this paragraph are drawn from the Bank of Japan historical compendium published in 1966.

24. Suzuki (1994, p. 181).

25. Nakabayashi (2012, p. 392).

26. Nakabayashi (2012, p. 378). See also Vlastos (1989, p. 373).

27. Jansen (2000, p. 373). See chapter 4 for details of foreign financial control in Egypt.

28. Sussman and Yafeh (2000, p. 446).

29. Sussman and Yafeh (2000, p. 450).

30. Sussman and Yafeh (2000).

31. Sussman and Yafeh (2000, p. 446).

32. Koyama, Moriguchi, and Sng (2018).

33. By 1850 (i.e., before the railroad), a trip between the two largest cities, Edo (Tokyo) and Osaka, took only four days, and no one in Japan lived farther than 120 km (75 miles) from the sea (Sng and Moriguchi, 2014, p. 445).

34. Koyama, Moriguchi, and Sng (2018, p. 192). This point is sustained by Jansen (2000, p. 333).

35. Initially, demands for elections were channeled by disenchanted Meiji leaders, who capitalized on social discontent with high taxation among local notables (the old-regime elite) and small farmers (Vlastos, 1989, pp. 402–425).

36. Vlastos (1989, p. 426).

37. Jansen (2000, p. 418).

38. For instance, male franchise in Europe also discriminated in favor of big taxpayers (Mares and Queralt, 2015, 2020).

39. Ramseyer and Rosenbluth (1998, ch. 3).

40. Nakabayashi (2012, p. 391).

41. Jansen (2000, p. 418).

42. See Vlastos (1989) for three waves of localized insurrection.

43. Stasavage (2011).

44. Asakura (1967, p. 277); He (2013, p. 86).

45. Asakura (1967); He (2013, ch. 3).

46. Asakura (1967).

47. Jansen (2000, p. 373).

48. Bank of Japan (1966, p. 158).

49. Johnson and Koyama (2014).

50. Jha (2012, p. 15).

51. Nakabayashi (2012, p. 388).

52. He (2013, p. 97).

53. Vlastos (1989, p. 392).

54. Jansen (2000, p. 365).

55. Jha (2012, p. 16).

56. Jha (2012).

57. Arguably, the kizoku—the noble but less numerous ex-samurai—disproportionally benefited from this policy, leaving the ordinary ex-samurai behind.

58. Sylla (2002).

59. See, for instance, Taylor (1992) or Schwartz (1989).

60. Halperin Donghi (1982); López-Alves (2000, ch. 4); Oszlak (2004, ch. 2); Rock (2000).

61. Cox and Saiegh (2018); della Paolera and Taylor (2001, ch. 1); Saiegh (2013).

62. Ferns (1960, p. 397).

63. Marichal (1989, p. 80) shows that the share of military spending in external finance declined over time in favor of infrastructure spending.

64. Flandreau and Zumer (2004). Ford (1956, p. 141) offers larger estimates of debt service, as high as 60% of export revenue.

65. Cortés-Conde (1995, p. 163). Half of this quantity resulted from provincial and municipal debt, assumed by the central state in exchange for fiscal centralization.

66. Marichal (1989, p. 163); Ford (1956, p. 149).

67. The control of British firms of the rail network in Argentina took two steps: In 1890, the government sold major public lines to British firms to obtain liquidity to service external debt. In 1896, a £10 million loan was floated in London to liquidate the 5% and 7% railway guarantees (or subsidies) held by a dozen British railway companies operating in the country. Those loans had been raised during the years of bonanza, and the guarantees were consuming a significant portion of the revenue. The £10 million was transferred directly to the coffers of these companies. Although the sale of national networks in 1890 and the railway guarantees raised political opposition, the national state moved ahead because it was part of the larger debt restructuring negotiations (Marichal, 1989, pp. 163–165). The revision of the railway code of 1907 produced a new set of favorable conditions for further expansion of the private (hence British) network (Cain and Hopkins, 2016, p. 270). The virtual monopoly over railroads (plus new gains in the banking and insurance sectors thanks to weak conditions of local competitors) put British investors at the forefront of the export boom in the 1900–1914 years, hence first in line to accrue profit.

68. Author’s calculation based on Ferguson and Schularick’s (2006) data.

69. Peters (1934, p. 143).

70. Saylor (2014, p. 94).

71. There are at least two reasons for the small size of domestic holders of government bonds in Argentina: One points to the demographic composition of the country (Taylor, 1992), another to the weak incentives of landowners or estancieros and local banks to invest in government securities given the high rates of return of land acquisition and industrial production (Peters, 1934, p. 34).

72. Peters (1934, p. 104).

73. Key explanations include the inability to control inflation (della Paolera and Taylor, 2001) and the denomination of debt in foreign currency—the “original sin” (Eichengreen and Hausmann, 2005). Illuminating surveys can be found in della Paolera and Taylor’s (2003) edited volume A New Economic History of Argentina, and Glaeser, Di Tella, and Llach’s (2018) special issue of Latin American Economic Review.

74. Oszlak (2004, pp. 230–250); Schwartz (1989, ch. 6). Kurtz (2013) points to the early incorporation of the middle class into politics (a phenomenon Oszlak relates to discontent from austerity policy in the 1890s) as the main cause of languid elite support of tax reform in Argentina.

75. Suzuki (1994, p. 183).

76. Suzuki (1994, p. 184).

77. Swam (2009, p. 3).

78. Paik and Vechbanyongratana (2019).

79. Tej (1968, p. 79).

80. Ingram (1955, p. 177).

81. Ingram (1955, p. 177).

82. Ingram (1955, pp. 176, 185).

83. See chapter 5 for details.

84. The first record of domestic sovereign loans dates from 1933 (Wilson, 1983, p. 251).

85. Ingram (1955, p. 182).

86. Tej (1968, pp. 88–89).

87. Tej (1968, p. 117).

88. Tej (1968, pp. 92–94).

89. Riggs (1966, p. 139).

90. Brown (1992).

91. Tej (1968).

92. Tej (1968, p. 215).

93. Tej (1968, p. 17).

94. Scott (1998).

95. Tej (1968, p. 240).

96. Paik and Vechbanyongratana (2019).

97. Riggs (1966, p. 131).

98. Batson (1984).

99. Handley (2006, pp. 35–37).

100. Handley (2006, p. 42).

101. Britain, which had abandoned the gold standard after the crash to keep the economy afloat, was off the table. Despite lacking US dollars in their foreign reserves—overwhelmingly denominated in pounds sterling—Siamese delegates approached American financiers. Liquidity in the US was tight too, and requirements draconian, including control over customs revenue and the northern and northeastern rail lines. This would have “give[n] foreign interests a degree of economic control which Thai governments for a century had skillfully maneuvered to avoid” (Batson, 1984, p. 195).

102. Batson (1984, p. 188).

103. Handley (2006, p. 37).

104. Batson (1984, p. 221).

105. Batson (1984, p. vi).

106. Handley (2006, p. 44).

107. Riggs (1966) for a long and compelling elaboration.

108. See Wilson (1966, p. 155), Riggs (1966, p. 316), and Thak (2007) for longitudinal statistical evidence of overrepresentation of civil and military officials in the executive and legislature.

109. Baker and Phongpaichit (2014, p. 120).

110. Average for 1953–1973 computed by the author based on data in Thak (2007, p. 227).

111. Acemoglu, Ticchi, and Vindigni (2011). For the collusion between bureaucrats and big businessmen in Thailand, refer to Baker and Phongpaichit (2014, ch. 9).

112. Doner (2009) and Slater (2010, pp. 241–250), respectively.

113. Author’s calculation based on Wilson (1983).

114. Sachs and Williamson (1985, p. 544) show that tax revenue as a percentage of GDP in Thailand in 1982 was 13.9 points, whereas East Asian and Latin American averages were 20.6 and 22.2 points, respectively.

115. IMF Government Finance Statistics Yearbooks, WB, and OECD, https://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS?locations=TH (retrieved May 11, 2021).

116. Baker and Phongpaichit (2014, ch. 6). Note that US administrations used Thailand as a bastion against communism in the region.

117. See Wilson (1983, pp. 255–268) for disaggregated international aid data to Thailand.

118. Thak (2007, pp. 167–177).

119. Baker and Phongpaichit (2014, p. 169).

120. Outstanding public or public-guaranteed external debt was 4.57% in 1970 and 27.53% in 1987. World Bank, International Debt Statistics, https://data.worldbank.org/indicator/DT.DOD.DPPG.CD (retrieved May 11, 2021).

121. In 1997 alone, over two million jobs were destroyed and GDP growth plummeted by 11 percentage points.

122. Slater (2010, p. 241).

123. Riggs (1966).

124. Tibebu (1995, ch. 2).

125. Mennasemay (2005); Pankhurst (1968).

126. Pankhurst (1968, pp. 591–602).

127. Marcus (1969, pp. 451–453).

128. Vestal (2005, p. 24).

129. Zewde Gabre-Selassie (2005, p. 107).

130. Marcus (1969, p. 433).

131. Marcus (1969, p. 435).

132. Pankhurst (1968, p. 537).

133. There was one important exception: French and British investors financed a railway that connected Addis Ababa (the capital) to the port of Djibouti, de facto opening Ethiopia to international markets (Ram, 1981).

134. Keller (1991); Pankhurst (1968).

135. Keller (1991, pp. 95–102).

136. Marcus (2002, ch. 11).

137. Hess (1970).

138. Broich (2017, p. 18).

139. Lemi (2007).

140. OECD, Query Wizard for International Development Statistics, https://stats.oecd.org/qwids (last retrieved May 13, 2021).

141. Marcus (2002, p. 166); Kissi (2000); Zewde (2001, ch. 5).

142. Keller (1991, pp. 113–118).

143. Degefe (1992).

144. Complementary efforts to radiate state presence were also abandoned. For instance, public spending in education was reduced in the countryside and concentrated in the capital (Mengisteab, 2002, p. 181).

145. Broich (2017, pp. 33–34).

146. Marcus (2002, p. 209).

147. Marcus (2002, p. 213).

148. Mengisteab (2002, p. 182).

149. Lemi (2007).

150. See Mengisteab (2002) for a critical assessment of state building efforts in the first decade of the democratic regime that followed.

151. Coutts and Laskaridis (2019); Manyazewal (2019).

152. Marichal (1989, p. 33).

153. See Dell (2010) and Guardado (2018) for a detailed account of Spanish rule in Peru.

154. For further contextualization of this war, including Argentina’s participation, see Collier (2003, ch. 3).

155. Three-fourths of war expenses were covered with tax revenue; the remaining with domestic public debt. Credit markets were tight in Chile. In August 1836, the executive tried 400,000 at 4% to expand the navy (Barros Arana, 1880, p. 38). This quotation failed and the target was reduced in September to half that quantity. Only 105,000 was contracted in the end, one-fourth the original target. Additional sources were liberated by a 10% domestic debt relief and by inducing taxpayers in arrears to repay in full in return for a reduction in the interest rate (Cruchaga, 1878, p. 50).

156. Humud (1969, p. 86).

157. Pastén (2017).

158. Collier (2003, p. 24).

159. Centeno (2002, p. 57).

160. Soifer (2015, p. 163).

161. Hollett (2008). See Vizcarra (2009) for European demand of guano.

162. Farcau (2000, p. 17).

163. Saylor (2014, p. 64).

164. Sicotte, Vizcarra, and Wandschneider (2010, p. 300).

165. Ortega (1984).

166. Faundez (2007, p. 49).

167. Sater (2007, p. 18).

168. Sater (2007, pp. 21–22).

169. Subercaseaux (1922, p. 96).

170. Sater (1985, p. 142).

171. Subercaseaux (1922, pp. 94–98).

172. Collier and Sater (1996, p. 147).

173. Sater (1976, p. 328).

174. O’Brien (1980, p. 20).

175. Sater (1985, p. 140).

176. Mamalakis (1976, table 6.1).

177. Sater (1985, p. 140).

178. Interest at yield was between 6.6 (min) and 8.2 percent (max).

179. O’Brien (1979, p. 105).

180. Kurtz (2013, pp. 81–93).

181. Vergara and Barros (1972).

182. Sater (1976, pp. 324–326).

183. How did the War of the Pacific affect tax capacity in Peru and Bolivia, also in default? The impact for Peru was devastating; however, this country had lost control of its main sources of revenue to foreign bondholders years before the war. Both guano and railways were in the hands of European investors as part of loan contracts and default settlements signed in 1869 and 1870–1872 (details in chapter 2), hence their limited ability to respond to Chile’s aggression. In Bolivia, war increased tax receipts relative to prewar years (Peres-Cajías, 2014; Sicotte, Vizcarra, and Wandschneider, 2008), arguably because the baseline was low to begin with. Importantly, the War of the Pacific put in motion a series of political and state building reforms in Bolivia, which crystallized in the next decades (Klein, 2011, p. 143). On the eve of WWI, central government revenue as a percentage of GDP in Bolivia had more than doubled relative to 1883, and the budget was regularly balanced (Peres-Cajías, 2014). For specific accounts of the fiscal effects of the War of the Pacific in Peru and Bolivia, see Sabaté Domingo and Peres-Cajías (2020) and Sicotte, Vizcarra, and Wandschneider (2008, 2010).

184. Blakemore (1974).

185. Barría Traverso (2008).

186. In 1880, inhabitants numbered 838 per public employee. In 1900, that number decreased to 244, a change that illustrates massive administrative growth (Barría Traverso, 2015, table 2).

187. See Cariola Sutter and Sunkel (1982) for a comprehensive survey of public investment.

188. Vergara and Barros (1972).

189. Blakemore (1974).

190. Electoral interference by the president involved manipulation of voter registration (calificaciones) and intimidation by the national guard on election day, among other tactics. The president also replaced some public administrators with would-be congressmen as a means of buying their loyalty. All presidents use these informal powers to build support coalitions in Congress (Collier and Sater, 1996, pp. 55–58).

191. Heise González (1974, p. 133).

192. Collier and Sater (1996, p. 122).

193. Vergara and Barros (1972, appendix tables).

194. Blakemore (1974, p. 170).

195. Vergara and Barros (1972, pp. 87–90).

196. Edwards (1945); Ramírez Necochea (1969).

197. Balmaceda opposed monopolies, not foreign ownership; for instance, he coalesced with British investors to dismantle the Nitrate Railways Company but not with the proletariat. He sent the army to repress miners rioting in the north and in Santiago for better labor conditions. See Heise González (1974) for an extensive critique of the antioligarchic interpretation of Balmaceda’s policy.

198. Reinsch (1909, p. 513).

199. Eaton (2004, p. 90).

200. Kurtz (2013, p. 89). This tension is captured by the Polity IV dataset. Although the overall democracy index decreased two points from 5 to 3 from 1890 to 1891, the executive constraints score increased from 5 to 7 and remained there after WWI (Marshall and Jaggers, 2000).

201. Faundez (2007, p. 59).

202. Collier and Sater (1996, p. 188).

203. Eaton (2004).

204. Edwards (1945); Ramírez Necochea (1969).

205. Bowman and Wallerstein (1982).

206. I retrieved this information for budgets of fiscal years ending in 0 and 5.

207. My estimates are slightly more conservative than those in Sabaté Domingo and Peres-Cajías (2020), who nevertheless show the same general pattern: 82% of the 684 employees in the Ministry of Finance in 1870 worked in customs, compared to 74% of the 1,599 employees in 1900 (Sabaté Domingo and Peres-Cajías, 2020, table 6).

208. Bowman and Wallerstein (1982, p. 451).

209. See for instance, Gleisner (1988, p. 109).

210. Rojas Böttner (2019, pp. 90, 94). See Edwards (1917) for compelling evidence that municipalities remained underfunded for the many tasks they were expected to execute—but that is another debate.

211. Soifer (2015, p. 174).

212. See Rojas Böttner (2019, table 12) for longitudinal data of tax police officers.

213. Soifer (2015, p. 163).

214. Acemoglu and Robinson (2019); Stasavage (2020).

215. Levi (1988).